Two-thirds of the states allow the sale of cannabis for medical purposes. A handful of states, including Alaska, California, Colorado, and Washington, allow the sale of cannabis for recreational purposes. As an entrepreneur, you may find that your dispensary is outgrowing your state, so you may be planning to expand to other states. While attempting to standardize your multi-state operator (MSO) tax planning, bookkeeping, and accounting, you may find that things get complicated quickly.
How Internal Revenue Code § 471(c) Impacts MSO Tax Planning
On the surface, IRC 417(c) seems like a victory for marijuana operators. It allows marijuana businesses that record less than $25 million in revenue in their ' MSO bookkeeping to implement an internal accounting method where they may be able to categorize most of their business operating expenses as COGS. This would allow a multi-state operators MSO accountant to categorize expenses that are not included under I.R.C. §280E as COGS, permitting an operator that generates less than $25 million in revenue to have the possibility of reducing their tax liability.
However, there are two issues that may make this IRC code complicated for you. First, since the IRS has yet to provide clear guidance on how I.R.C. § 471(c) applies to multi-state operators bookkeeping for the cannabis industry, you could under-report tax liability, although you are acting in good faith and intend to follow this code.
A second issue you or your multi-state operator CPA may face is that because of the IRS’s inability to maintain uniform industry compliance, different size marijuana businesses will be taxed differently. A small MSO that records less than $25 million in their multi-state operators MSO bookkeeping might reduce their tax liability by using the internal accounting method discussed above.
However, an MSO that generates $25,000,000.01 could face a disproportionately higher tax treatment. This makes compliance complicated. At Fusion CPA our multi-state operators MSO accountants are well-versed in tax laws pertaining to the cannabis industry. We can offer accounting and tax planning services to help you make sure that your business is in compliance with all IRS laws.
State Regulations Can Impact a Cannabis Company's Growth Ability
Multi-state operators should execute a coherent plan for growth that recognizes a federal and state legislative road map, which fluctuates each day. No two states have the same regulations for taxation and distribution.
• As of July 1, 2017, Nevada legalized the sale of medical and recreational marijuana. They are charging a wholesale excise tax of 15 percent, a retail tax of 10 percent, and a sales tax of 6.85 percent plus any local tax.
• Oregon allowed marijuana to be sold legally in 2014 with recreational licenses being granted on October 1, 2016. They require a 17 percent sales tax with a local option tax of up to three percent.
• Washington began retail sales of marijuana in July 2014. They have a 37 percent tax on retail sales plus a 6.5 percent retail sales tax to which local taxes may be added. Medical marijuana sales are exempt from these taxes as of June 2016.
These are just a few examples highlighting the patchwork of state laws that MSOs need to navigate if they are to be in compliance with the law.
Practical Guidance for your MSO
As a cannabis MSO, you may have faced the headache of paying taxes that are substantially higher than what operators in other industries pay. Fusion CPA has a team of experienced MSO financial advisers who can guide you through the intricacies of cannabis tax law and regulations.
We can discuss the tax impact of using various strategic approaches when calculating your taxable income. Our team of accounting professionals offers to help you minimize negative tax impact and limit exposure to action by the IRS. Whether you are an entrepreneur breaking into the cannabis business or if you are an established entity looking to grow into other states, we have the resources to assist you. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.