Frequently Asked Questions
Staying compliant and following all tax guidelines can be complicated for any business, but cannabis and hemp companies face specific laws and requirements. Here are some answers to questions you might have on the matter.
Why does the IRS treat cannabis businesses differently than other businesses?
Cannabis businesses are treated differently because The Controlled Substances Act lists Cannabis as a Schedule I substance. It is federally illegal to traffic in Schedule 1 substances. Businesses that traffic in certain controlled substances are subject to IRC section 280e, which restricts many of the advantages that other businesses enjoy.
What is section 280e?
Section 280e of the Internal Revenue Code prohibits taxpayers who are engaged in the business of trafficking certain controlled substances (including, most notably, marijuana) from deducting typical business expenses associated with those activities. This means that for federal tax purposes, Cannabis businesses cannot deduct the ordinary and necessary expenses that other businesses are able to deduct. This makes the Cannabis Company pay more federal income tax, decreases their cash flow and makes it more difficult for them to be profitable.
What are common 280e misunderstandings that Reefer CFO can help clarify?
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Why is having proper accounting so important for cannabis businesses?
Applying the proper accounting code sections based on the type of Cannabis business at hand is key to being able to take advantage of those reductions, which also decreases the tax bill and helps to boost cash flow.
How does Reefer CFO help cannabis businesses thrive despite the challenges they face?
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How is cannabis accounting different than other kinds of accounting?
For the time being, cannabis is still federally illegal. Because of this, everything from banking to supply chains, payroll and paying bills is more complicated for cannabis business owners than for most other businesses. Cannabis also spans across various industries, including but not limited to farming, retail, and food production, and many cannabis companies involve more than one of these. This means that a cannabis accountant must be familiar with all of these industries, whereas most other accountants can specialize in a specific area.
Furthermore, cannabis accountants need to stay up to date with the specific regulations delineated for cannabis as well as all other industries involved, and be able to help their clients navigate through them correctly and efficiently. And as if all of this weren’t complicated enough, a lot of cannabis businesses are cash-only since a lot of banks are nervous about dealing with a business that’s essentially breaking federal law even when protected under state law. There are a lot of moving parts in the role of a cannabis accountant.
Why are taxes for cannabis-related products and services so high?
Cannabis businesses need to pay income taxes on their gross profit rather than on their net income. This is because the way these businesses must report their profits to their state differs from how they must report it to the federal government since the latter has classified Marijuana as a Schedule 1 drug. Also due to this is the fact that cannabis businesses cannot claim many of the deductions a lot of other businesses can, which can raise their income tax rates as high as 90%.
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