In the United States, tax revenue is the major source filing both federal and local budgets. It is a quite common thing for an entrepreneur to think they pay too much taxes. But when it comes to a marijuana-related business, it is more likely to be true. Not only did certain states impose excise taxes on cannabis businesses, but also federal marijuana tax laws are not exactly business-friendly. So the question is, what can you do to pay less taxes without breaking the law?
While the idea of paying the excise taxes certainly does not make any entrepreneur happier, it has its benefits. And it is not only about your local communities, schools, and healthcare programs getting more money. Paying state excise taxes allows you to either include these taxes to the cost of your products and/or services or to subtract these taxes from your weed profits (for the purposes of calculating net profit).
First of all, see if you have included everything you could in your COGS (cost of goods sold). Since marijuana is still prohibited on the federal level, marijuana businesses fall under the IRC Section 280E. It means they cannot deduct any of their business expenses and, therefore, need to pay more taxes than any other business located in the same state.
Fortunately, while you still cannot deduct your business expenses from your gross income, you can include some of them in your COGS. And it will be 100 percent legal.
The list of the expenses that may be included in the COGS varies for different categories of the taxpayers. For example, producers may include in their COGS the production costs, both direct and indirect. In some cases, producers' COGS may also include certain taxes, employee benefits, insurance costs.
Retailers' COGS, on the other hand, may include not only the price of cannabis itself but also the necessary expenditures in connection with acquiring cannabis products and the transportation costs.
However, there are a few expenditures that you cannot add to your COGS, including advertising, marketing, research and distribution expenses, income tax, general administrative expenses, and more.
When you have two businesses running in the same location, you can split the expenses between them. And if one of these businesses has no relation to marijuana or any other controlled substance, you do not have to deal with the limitation set by 280E. Therefore, you can get more profit and pay less taxes.
While this method is not an easy one, it certainly may help some entrepreneurs. Just remember that you should be able to identify which part of the expenses is linked to what business. And, of course, you need to keep the books and the records of each business separately.