Tax Reform and the Cannabis Industry

You won’t get a Section 199A tax deduction for your cannabis business. But some of the other tax reform changes may make the C corporation a more attractive choice of entity than before.

Let’s look at an example. Say the cannabis business has the following financials:

 

Cash

Tax

Gross Receipts

$500,000

$500,000

Cost of Goods Sold

-$325,000

-$325,000

Gross Income

$175,000

$175,000

Business Expenses

-$100,000

-$0

Taxable Income

$75,000

$175,000

If the business is an S corporation and you are in the 32 percent federal income tax bracket:

  • You’ll pay $56,000 in federal income tax on the taxable net income (32 percent of $175,000)
  • You’ll need to distribute 75 percent of the $75,000 net cash income just to cover the federal income tax bill.
  • Your adjusted gross income increases by $175,000, not only causing you to lose various tax benefits but also subjecting you to possible additional taxes (such as the net investment income tax).

 

If the business is a C corporation:

  • Your corporation pays $36,750 in federal income tax on the net income (21 percent of $175,000)
  • Your after-tax profit is $38,250, which you can retain in the C corporation or distribute as a dividend. For every $1,000 you distribute as a dividend, you take a $150 tax hit on your individual tax return. If you distribute the entire $38,250, your tax on the dividends would be $5,737 and your total tax would be $42,487 (significantly less than the $56,000 as an S corporation owner).
  • Your personal Form 1040 adjusted gross income is unaffected by the C corporation’s net income (unless you distribute dividends). The key is that the “phantom” income created by Section 280E doesn’t impact your individual tax return—only the corporation’s.

Because Section 280E creates “phantom” income for tax purposes (that is, the income doesn’t exist in real cash), it makes the S corporation and other pass-through entities less attractive overall for the cannabis business.

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Do you need more 2020 tax deductions?

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2021 Last Min – Year End Retirement Deductions

2021 Last-Minute Year-End Retirement Deductions
The clock continues to tick. Your retirement is one year closer.
You have time before December 31 to take steps that will help you fund the retirement you desire.
Take a few minutes to review the four retirement plan tax-reduction strategies in this article.
You might find several thousand dollars (and maybe much more) in your pocket by taking the actions in this article. But you’ll need to act now to get the cash.

Last Minute 2020 Biz Deductions

The purpose of this post is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Here are seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020.

Year End Medical Plan Strategies

Here are the six opportunities for you to consider for your business’s Year End Medical Plan Strategies.

Want to know more?  Have some tax questions of your own?  Get in touch with us and we’ll guide you thru the tax and accounting process.

15 + 1 =

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But the safest fixed income investments (CDs, Treasuries, and money-market funds) are still paying microscopic interest rates.
For example, when this was written, the 10-year Treasury was yielding about 1.92 percent. Ugh!
Meanwhile, the pandemic might or might not be coming to an end, the economy might or might not be okay, and inflation might or might not be controlled. Who knows?
In this uncertain environment, investing some of your IRA money in gold or other precious metals such as silver and platinum may be worth considering. Ditto for holding some precious metal assets in taxable form. This article explains the federal income tax implications. Here goes.

The Mom and Dad Hotel

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QSEHRA and HRA

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