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Tax Deductions for Cannabis Companies

June 19, 2023

The US Tax Code and the cannabis industry are not always on the same page, since cannabis restrictions vary widely across the country. While cannabis is illegal in some states, in others it is decriminalized or legal for adult use. In addition, cannabis is federally labeled as a Schedule I drug, the most restrictive of the four levels. This complicates the tax breaks and incentives that are normally afforded to other businesses. In fact, IRS Tax Code 280E states that no company can receive a deduction or aid if the business products or services include schedule I or II drugs. This includes states in which adult-use cannabis is legal and medical clinics with licenses.

Cannabis businesses must pay federal taxes, yet they cannot receive most federal aid. This directly impacts the legal cannabis industry, especially during local or widespread economic crises.

Despite the difficulties, there are still tax breaks and incentives that are afforded to cannabis businesses. Here are a few.

Research and Development Tax Credits

Because the legal cannabis industry is so new, the opportunities to innovate and discover untapped possibilities are generally higher than in other long-established industries. While this alone has spurred research into new products, uses, and services within the cannabis industry, R & D tax credits add an additional incentive to continue to improve and develop cannabis products.

This credit allows cannabis businesses to offset their state and federal taxes by applying for a dollar-for-dollar R & D tax deduction for applicable expenses. These expenses include:

  • Hiring employees to provide product research,
  • The cost of products to perform product research,
  • Patents and Intellectual Property, and
  • Expenses associated with solving problems and improving upon already existing products.

Apply for the R & D credit here.

Retirement Plans

One of the largest misconceptions when it comes to retirement plans is that they are illegal for the cannabis industry. Retirement plans for the cannabis industry are 100% legal. This means your cannabis business can take advantage of the many tax credits and ease your business expenses.

Cannabis businesses may rightfully worry that sponsoring a retirement plan will be too expensive. However, there are many tax incentives that help balance out the initial cost. In 2023 Secure 2.0 passed several provisions that will benefit small businesses such as increased start-up credit for small employer-sponsored 401(k) plans. For employers with 50 or fewer employees, the tax credit increases from 50% up to 100% of the qualified costs incurred in the first three years of starting up a new plan. The credit is still limited to $5,000 per year. It also clarifies that small businesses joining a multiple employer plan (MEP) are eligible for the credit.

Additionally, California Cannabis Entrepreneurs who offer their employees a 401(K) have opportunities for additional tax relief. The High-Road Cannabis Tax Credit (HRCTC)  allows taxpayers conducting a qualified cannabis business may receive a tax credit of 25% and The Cannabis Equity Tax Credit (CETC) provides a $10,000 tax credit to qualified cannabis businesses.

Business owners can also use the company retirement plan to reduce their taxable income through company-owner contributions. For more information, we have listed several additional retirement plan tax incentives that retirement plans can offer your cannabis company.

As a bonus, a retirement plan is a legitimizing force. It is one step towards eliminating the stigma around working in the legal cannabis industry. Most prospective employees for managerial positions and above will expect benefits to be a part of their work. 401(k)s allow you to grant many of the same benefits that non-cannabis businesses provide their employees.

However, finding the right company to sponsor your cannabis business may be difficult as most retirement companies choose not to serve the cannabis industry. At Leading Retirement Solutions, we believe every legal cannabis company has the right to a retirement plan.

Cost of Goods Sold

While section 280E implies that tax deductions and credits are universally banned for cannabis companies, there is one exception: deductions from the cost of goods sold. The cost of goods sold is essentially how much it costs to produce the products or services that the company sells; in this case cannabis products. However, this benefit does not apply to other business expenses like salaries, advertising, building expenses, etc.

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