California cannabis business tax queries continue to roll in as the state continues to regulate this budding industry. This is why we decided to create our California cannabis business tax FAQ.
Below, you’ll find the answers to some of the most common questions about California cannabis business taxation. If you have any questions we might have missed in this article, feel free to contact us at any time.
We’re always happy to assist in any way possible to ensure ‘elevated’ business operators succeed!
Interested in scaling your cannabis business in Cali? Our team specializes in cannabis financials. Contact us now to learn how we’ll grow your business with expert assistance and the right systems in place.
Who pays cultivation tax?
Buyers of cannabis and cannabis products have to pay an excise tax of 15%. However, retailers also must pay the excise tax to their distributors, which is based on the average market price of retail sales. Retailers can pass the excise tax cost on to the final purchaser by including this cost in the sale.
How do dispensaries pay federal taxes?
Since traditional banking isn’t accessible for dispensaries, these businesses usually pay taxes in case. However, this results in a penalty. Even though the government requires these operations to pay taxes, its tax and drug policies punish them for paying in cash.
Federal law requires tax payment on all income, even if it’s been earned illegally. Thus, regardless of whether these operations are legal federally, they must file a tax return per their type of entity status.
Marijuana dispensaries that pay taxes cannot deduct business expenses easily. This is because of the 280E tax code, which doesn’t allow expense deductions for businesses that illegally trafficked a Schedule I or II controlled substance per the federal Controlled Substances Act.
According to the IRS, Section 280E doesn’t ban cannabis industry participants from reducing their gross receipts by cost of goods sold to determine gross income. It’s possible to reduce gross receipts by the cost of obtaining or producing the cannabis sold, and these costs are aligned with the nature of the business.
Despite 280E’s limitations, we help our clients navigate 280E limitations by structuring their operations to allow for expense deductions. Contact us now to learn more about how we can structure your cannabusiness to bypass 280E.
What kind of tax is excise tax?
Excise taxes are the taxes placed on certain goods or services. This includes tobacco, alcohol, and fuel. These taxes are mostly paid by businesses, which results in price increases for consumers. It’s possible to pay excise taxes by a percentage or per unit.
Is there excise tax in California?
California has general excise taxes it collects on gasoline and diesel sales, cigarettes (by the pack), and cell phone service plans. However, other products and services require excise tax collection, too. These include cannabis, transportation tickets, gas-guzzling vehicles, firearms, tanning salons, vehicle sales, and more.
If a California cannabis business gives cannabis away, what tax is owed?
Cannabis businesses in California have two ways to distribute free cannabis. Each option has its own tax implications.
The first method involves offering free samples. For instance, a dispensary offers a free gram of weed to customers on opening day. In this situation, the cannabis provided as a free sample would be calculated into your cost of goods sold (COGS).
To calculate COGS, you’ll need to use the formula Beginning Inventory + Purchases – Ending Inventory = COGS.
Let’s say you begin with $1,000 in product. This is your beginning inventory. From there, you’ll need to add the purchases of products you created, including the free gram bags you gave away on opening day. This results in $20,000 in purchases that day.
Your ending inventory value is $10,000.
To determine your COGS, you’ll add $1,000 + $20,000 – $10,000 to get $11,000. Rolling the samples you gave away into your COGS, you wouldn’t have additional tax obligations.
The other method involves offering a BOGO (buy-one-get-one) deal on grams. Instead of selling an edible for $15, you might sell 2 for $15. This is a 50% discount on edibles.
However, this could impact the way your business is taxes. For this situation, the promotion is a discount as opposed to free cannabis. Thus, the entire transaction is allocated in sales, which means you’ll need to pay taxes on the full value of the product, despite the customer paying significantly less.
The problem here is that if word about the deal gets around, you’ll expose yourself to more significant tax liability as you will not have enough income to offset the tax.
In California, regardless of your sales, you’ll have to pay a minimum of $800. Cali also could hold you liable for additional franchise taxes if your gross sales exceed $250k. If you’re operating a dispensary, chances are, you’ll hit this threshold.
For instance, if your Cali dispensary’s gross sales were $600k with $120k in BOGO discounts and you lost $100k, you could have some trouble. Despite the $100,000 loss resulting in no federal tax or state tax due, you’ll still have to file a form 568 – the franchise return.
Your franchise return will consider the $600k in gross sales, and this is where your BOGO deals can come back to haunt you. You would have additional taxes to pay.
What California cannabis tax implications should I be aware of as I operate?
Cali levies an excise tax on most cannabis products. This tax is a business-based tax on specific goods. At this point, the cannabis excise tax is 15 percent of the average market value of cannabis at retail. Once cannabis comes into the commercial market, a cultivation tax is applied, which is based mainly on the weight and type of cannabis.
For cultivation tax purposes, the state has three categories in place: cannabis flower, fresh cannabis plant, and cannabis leaves. After Assembly Bill 1872 passed, the cultivation tax rates for 2021 will stay the same as in 2020. Cultivation tax rates in California will not change until the start of 2022.
Also, cannabis retailers are no longer allowed to give cannabis or cannabis products away unless they receive permission from the Bureau of Cannabis Control (BCC). This agency is responsible for administering cannabis licensing activities for distributors and retailers. With the appropriate authorization, you are not subject to the cannabis excise tax. However, you might owe use tax on the purchase price of cannabis or cannabis products.
California Cannabis Business Tax Help
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