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.

Home Office Deduction

Home Office DeductionWith a growing number of business owners now working from home, many may qualify for the home office deduction, also known as the deduction for business use of a home. Usually, a business owner must use a room or other identifiable portion of the...

Buying a new Electric Vehicle? Know this tax info..

Buying an Electric Vehicle? Know These Tax Law ChangesAre you thinking of buying an electric vehicle or a plug-in hybrid?   And are you looking to benefit from the $7,500 tax credit? If so, you have much to consider—thanks to the newly enacted Inflation Reduction...

Earn 9.6% for 6 Months Guaranteed!

Earn 9.6% for 6 Months Guaranteed!September 2022 More on Earning 9.62 Percent Tax-Deferred You can buy from now through October 31, 2022, Series I bonds from the U.S Treasury that pay 9.62 percent tax-deferred interest. If you buy now, you earn that 9.62 percent for...

Inflation Alert: Consider Investing in TIPS

Inflation Alert: Consider Investing in TIPS The Fed is finally taking aggressive action to fight inflation, but will it work? Where’s the stock market headed? Who knows? Real estate might be a good inflation hedge, but it’s a non-liquid asset and no sure thing....

Health Savings Accounts: The Ultimate Retirement Account

Health Savings Accounts: The Ultimate Retirement Account Looking to save for retirement? The first account you should open and fund is not an IRA (regular or Roth) or 401(k). If you qualify, your first retirement account should be a Health Savings Account (HSA). Don’t...

Do you need more 2020 tax deductions?

Do you need more 2020 tax deductions?

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.

9 + 8 =

Using Children’s IRAs to Pay for College

Using Children’s IRAs to Pay for College If your child has earned income (maybe from working in your business), you may want to consider establishing an IRA for your child. The IRA funds can, in turn, be used to help pay your child’s college expenses. When your child...

Clean Vehicle Credits

Taxpayers can now claim tax credits for new and used clean vehicles they buy during the tax year and, starting Jan. 1, 2024, can transfer that credit to the dealership. This means that the taxpayer who is buying the vehicle can exchange their credit for a financial benefit such as reduced final cost. The financial benefit is equal to the amount of the credit, whether in cash, a partial payment or a down payment.

NFT’s and Taxes

NFT's & Taxes Did you buy, sell, donate, or receive an NFT during the tax year? If so, you must answer “yes” to the digital assets question on page one of the IRS Form 1040. Additionally, if you have sold an NFT, you could be liable for tax or eligible for a...

Home Office Deduction

Home Office DeductionWith a growing number of business owners now working from home, many may qualify for the home office deduction, also known as the deduction for business use of a home. Usually, a business owner must use a room or other identifiable portion of the...

Cryptocurrency

Digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.

Digital assets include (but are not limited to):

Convertible virtual currency and cryptocurrency
Stablecoins
Non-fungible tokens (NFTs)

IRS standard mileage rates for 2023 increases 3 cents per mile

IRS issues standard mileage rates for 2023; business use increases 3 cents per mile