fbpx

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.

2020 Year-End Tax Strategies for Marriage, Kids, and Family

2020 Last-Minute Year-End Tax Strategies for Marriage, Kids, and FamilyIf you have children under the age of 18 and you file your business tax return as a proprietorship or partnership, you can find big savings in the work your children do for your business. And if...

Five things to know about employing your spouse.

Five things to know about employee in your spouse1. Pay Your Spouse Tax-Free Employee Benefits, Not Taxable Wages   You’ll realize no tax savings if you put your spouse on the payroll and pay him or her cash wages.  Employee wages you pay your spouse are fully...

Q&A: PPP Forgiveness Answers for S Corporation Owner-Employees

Q&A: PPP Forgiveness Answers for S Corporation Owner-Employees  Tax law definitions do not apply to much of the PPP, making it new ground for owners of S corporations. Here are answers to four questions of concern to many S corporation owners. 1. Spouse Owns S...

Use Your Business to Maximize Charitable Donations

…for the purposes of tax savings, some forms of giving are much more beneficial to you than are others

Solo 401(k) Could Be Your Best Retirement Plan Option

Solo 401(k) Could Be YourBest Retirement Plan Option Have you procrastinated about setting up a tax-advantaged retirement plan for your small business? If the answer is yes, you are not alone. Still, this is not a good situation. You are paying income taxes that could...

Congress Reinstates Expired Tax Provisions

The big five tax breaks that most likely impact your
Form 1040

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.

1 + 2 =

2020 Year-End Tax Strategies for Marriage, Kids, and Family

2020 Last-Minute Year-End Tax Strategies for Marriage, Kids, and FamilyIf you have children under the age of 18 and you file your business tax return as a proprietorship or partnership, you can find big savings in the work your children do for your business. And if...

New Stimulus Law Grants Eight Tax Breaks for 1040 Filers

New Stimulus Law Grants Eight Tax Breaks for 1040 Filers  The new, massive stimulus bill enacted into law on December 27, 2020, contains eight new tax breaks designed to help the non-business taxpayer. None of these tax breaks are earthshaking by themselves, but...

Five things to know about employing your spouse.

Five things to know about employee in your spouse1. Pay Your Spouse Tax-Free Employee Benefits, Not Taxable Wages   You’ll realize no tax savings if you put your spouse on the payroll and pay him or her cash wages.  Employee wages you pay your spouse are fully...

Q&A: PPP Forgiveness Answers for S Corporation Owner-Employees

Q&A: PPP Forgiveness Answers for S Corporation Owner-Employees  Tax law definitions do not apply to much of the PPP, making it new ground for owners of S corporations. Here are answers to four questions of concern to many S corporation owners. 1. Spouse Owns S...

Spending the PPP Money on You and Your Employees

Spending the PPP Money on You and Your EmployeesIf you report your business income and expenses on Schedule C of your Form 1040, your Payroll Protection Program (PPP) loan forgiveness is straightforward, as you see in the four answers below. 1. Paying Myself Question....

What are My Self-Employed Tax Obligations?

What are My Self-Employed Tax Obligations? As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly. Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a...