2024 Cannabis Tax Expert Insights

April is tax season, but let’s be honest, you probably filed an extension. I did. Now, we have 6 months to get our 2023 tax filings right. I have a series of articles planned with super talented tax folks to help you minimize your 2023 tax obligations. This edition was made with my friend Jill Scher, partner at Marcum LLP (bio at end), who was kind enough to share some of her insights with me on cannabis tax issues.

Taxation in the cannabis industry is complicated, whereas some states have legalized it to varying extents, it is still considered to be a Schedule 1 drug by the federal government. In their eyes it is illegal to use cannabis in any capacity, although there are exceptions in cases where states have legalized its use. And because it’s not legal, thanks to IRC Section 280E, cannabis companies are getting very few breaks and paying lots of taxes. There are a lot of factors to consider between federal and state rules, so let’s dive in.

Jill’s Tax Joke: Why don’t cannabis businesses worry about high taxes? Because they’re always looking for the next joint venture!

Question 1: Are there new cannabis tax regulations that pertain to 2023 and beyond?

Jill: There is ongoing discussion about potentially rescheduling cannabis from a Schedule 1 drug to A lower tier, or descheduling completely. This change could have a profound impact on the industry. If cannabis is descheduled, it would no longer be classified as a controlled substance, which could eliminate the restrictions imposed by IRC Section 280E. If descheduled, cannabis businesses would be free to take standard business deductions, significantly reducing their tax liability. Alternatively, rescheduling cannabis to a less restrictive category could also ease some federal constraints, but the full implications would depend on how the rescheduling is structured. States also continue to evolve their strategies on tax regulations. The state approaches to decoupling from federal tax provisions like 280E vary, with some states offering tax relief for cannabis businesses, particularly for medical use, while others have extended the benefits to recreational cannabis businesses as well.

Needless to say, cannabis businesses must monitor both federal shifts and state-level regulatory changes to optimize their tax strategies effectively.

Question 2: What is the most common tax mistake you see cannabis businesses make?

Jill: Many cannabis businesses slip up by not maintaining meticulous financial records, an oversight that often leads to higher taxes. As mentioned, most deductions are disallowed for cannabis businesses as per IRC Section 280E, but some exceptions are made for Cost of Goods Sold (COGS) expenses. A more detailed chart of accounts and detailed categorization can help identify more deductible expenses and decrease cannabis taxes.

Question 3: What is the biggest tax risk for cannabis companies?

Jill: Non-compliance with tax regulations, especially IRS 280E, poses the greatest risk. Failure to comply with the provisions of IRC Section 280E can attract significant financial penalties and accumulated interest on taxes due. The IRS monitors cannabis businesses closely for compliance, which may result in a higher frequency of audits for the industry compared to others.

Question 4: What kind of software do cannabis businesses need to stay compliant and reduce taxes?

Jill: In the cannabis industry, selecting the right technology stack is crucial to managing the operational needs no matter the vertical: cultivation, processing or retail.

• Cultivators often need specialized agricultural software to manage planting, harvesting, and to monitor growth patterns and yields. These systems typically include capabilities for environmental control, ensuring optimal conditions for growth, and resource management to keep COGs in check. Processors require a tech stack that can manage the transformation of raw materials into final products, often including batch tracking and quality assurance functionalities. Software solutions for processors must also ensure compliance with regulations governing product potency and safety.
• Dispensaries rely on point-of-sale (POS) systems that are not just for handling transactions but also for managing inventory, ensuring customer verification, adhering to purchase limits, and submitting sales data to regulatory bodies. These systems often integrate with customer relationship management to offer a seamless retail experience.
• Inventory systems must be precise to ensure adherence to state and federal regulations, similar to protocols for managing controlled substances. They must be capable of tracking and reporting about product potency, safety, and inventory, as per regulations.
• The technology stack for all these sectors needs to connect with banking services that accept cannabis businesses. Banking integration is crucial for handling transactions, bill payments, and funding operations. Moreover, payroll software that can handle employee time tracking, wage calculations, and ensure regulatory compliance for employee payments is vital. These systems must interface efficiently with the rest of the tech stack, especially the banking services, to automate and streamline financial operations. Choosing a tech stack that facilitates integration across these various functions and compliance requirements is essential for operational success in the cannabis industry.

Question 5: What steps can cannabis companies take to put themselves in a better position now?

Jill: Cannabis businesses should focus on stringent record-keeping, involve accounting and tax experts familiar with cannabis regulations early on, and proactively adapt to legislative shifts to mitigate future tax liability.

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About Marcum LLP: At Marcum LLP, we’re not just accountants – we’re architects of financial success in the cannabis industry, offering bespoke strategies that help businesses flourish.