Tax strategy may not get everyone’s (or anyone’s) heart racing, but it is essential for your operation’s success. In the cannabis industry, just treading water requires constant awareness of liabilities and a commitment to improving your chances wherever possible. As you read on, you’ll notice we revisit many topics we’ve discussed before. With each discussion, however, we strive to add more nuance and depth. As an accomplished cannabis CPA firm, we’re committed to ensuring your company’s longevity. Read on to learn what’s most pertinent for your tax strategy.

Navigating Federal vs. State Tax Law

In one of our previous articles, we discussed state-level cannabis tax pressure. To recap: cannabis is taxed in three different ways (percentage-of-price taxes, weight-based taxes, and potency-based taxes), it’s taxed at higher rates than most other products, and this heavy tax burden can drive consumers to the illicit cannabis market.

However, federal tax laws also create challenges for cannabis operators, and understanding both is essential for a robust tax strategy.

Federal tax laws stipulate that cannabis remains a Schedule I controlled substance, which prohibits cannabis operators from deducting ordinary business expenses under IRC 280E. The only deductions cannabis businesses can claim are for Cost of Goods Sold (COGS), which includes raw materials and inventory, labor costs, utilities, rent, and other related expenses.

Fortunately, some states have “decoupled” from IRC 280E, meaning they choose not to follow this code. A good cannabis CPA will help you navigate the nuances of federal and state tax laws to maximize your deductions and, in the process, save your business as much money as possible.

Compliance & Risk Management

Strict compliance is huge for the cannabis industry. Your cannabis CPA should tell you that cutting corners is one of the easiest ways to deter investors and potentially incur costly fines. As we’ve previously discussed, one way to avoid these pitfalls is to have a compliance plan in place. Another way to stay compliant is to use compliance tools.

Cure8, a cannabis tech company, outlines several of these compliance tools, including software for seed-to-sale tracking, AI for risk detection, and blockchain technology for guaranteeing record integrity and product authenticity. Cure8 also recommends using a point-of-sale system that automates compliance tasks, as well as enterprise resource planning (ERP) software to optimize operations throughout the supply chain.

Your cannabis CPA will be invaluable in supporting risk management. With their specialized knowledge, your operation will be less likely to fall victim to fraud. They can also assist you in monitoring legislative changes, ensuring compliance with tax filings and licenses, and providing many other services.

One of the most important services a cannabis CPA can provide, especially regarding tax strategy and risk mitigation, is audit preparation. If you have a cannabis operation, it’s inevitable that your business will be audited at one point or another. Your cannabis CPA will work with you to ensure you have robust financial and operational internal controls — crucial in avoiding fraud and errors, which are rampant in the cannabis industry.

Thus, while software is enormously helpful in automating various tasks (such as seed-to-sale tracking and risk detection), a cannabis CPA is also a crucial part of your tax strategy.

Cost of Goods Sold (COGS) Maximization

As mentioned above, there are a limited number of deductions a cannabis business can make (assuming they are not located in one of the states that have decoupled from 280E). Therefore, it’s essential that you make the most of your COGS deductions to save where you can. A cannabis CPA will be invaluable in this pursuit.

A cannabis CPA will have an abundance of strategies for getting the most out of your COGS. These specialized CPAs will employ advanced costing methods — such as activity-based costing (ABC) — which assign overhead and indirect production expenses to products or production activities. This approach increases your COGS deductions by more precisely allocating costs allowed under federal tax laws.

Your cannabis CPA can also advise you on purchasing strategies to reduce material costs and minimize product waste, both of which directly affect your COGS.

Moreover, if you own a facility, your cannabis CPA can enhance your tax strategy by conducting cost segregation studies. These studies can improve tax efficiency and further refine your COGS calculations.

Conclusion

Your cannabis business’s tax strategy will come down to both technological assistance and human intervention. You’ll encounter several familiar faces that we’ve already discussed (and will likely discuss again). As with most aspects of your cannabis finances, Section 280E of the tax code is paramount. Compliance and risk mitigation are two more familiar faces, and with the support of software and a knowledgeable cannabis CPA, your chances of incurring costly fines or audits are greatly reduced.

But perhaps the area where your cannabis CPA will reign supreme in your tax strategy is in getting the most out of your COGS deductions.

At BTA Cannabis CPA Tax, we’ll help you understand your state’s relevant laws, ensure you remain compliant to the best of our abilities, and make sure you deduct every penny you can. Reach out today — we’d love to hear from you.