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SETTINGUPSAFELY
Whetherfor-profitornon-profit,followingkeyrulesprotectsyoufrom:
- Personallawsuits- Damages- TheIRS
- Othergovernmentagencies
CorporateStructureisYourFirstDefense
A. IFDONEINCORRECTLY,ITCOULDCOSTYOUEVERYTHINGINCLUDINGTHEROOFOVERYOURHEAD.
B.DONOTUSEABOILERPLATEINCORPORATIONKITORDOWNLOADSOMEONEELSE’SBYLAWS
C. Onesizedoesnotfitall
CorporateStructureisYourFirstDefense(con’t)
Issuestoworryabout:
-Indemnification-Assetprotection-Personalprotection-Taxes,lawsuits,confiscationofproperty,arrest
ObserveCorporateFormalities
#1.Buycorporatekit
- Notforstockcertificates(non-profitsdon’thavestock)
- Mainlyforcorporateminutes&bylawsregister
ReducingtheTaxBite
REMEMBER:COGSandproperclassifyingofexpenses
HOWYOU’REGOINGTOGETALUNCHDATEWITHTHEIRS
- Don’tmixmoneywithoutIOUs- Don’tusebankaccountforpersonalbills
- Don’twritechecksw/ocorrespondinginvoice- Don’tlinkbankaccounts!
- Ifyouhavemultiplecompanies,writechecks toeachotherandkeepaledger
CostofGoodsSold– MakeitBulletproof
Dealingwiththedreaded280eTheTwo-BusinessRuleTaxpayercanhavemorethanonetradeorbusinessAlverson v.CommissionerRegulations provide standards to determinewhetheractivities constitute separate businesses
Reg.§ 1.183–1(d)(1)42
CostofGoodsSold(con’t)
FullAbsorptionInventoryCostMethodSection471Taxpayer’smustincludeasinventoriable costsalldirectandindirectproductioncosts.ContinuingunderSection263A,UNICAPrulesrequireproducerofinventorytoincludeinthecostsofitsinventorydirectcostsofsuchproperty’spropershareofthoseindirectcostspartorallofwhichareallocabletosuchproperty.
Let’sSticktotheEasyOnes
Tocreatemorejustifiableexpenses&solidaudittrail:A. Dispensaryemployeesshoulddispenseforfree,but
educateforasalaryB. DispensariesshouldhaveanothermethodofcostingC. Everyemployeeshouldhavenon-marijuanarelated
jobdescriptionalongwithrealjobdutiesD. Anynon-COGSexpenseshouldbereworkedand
reclassified
WHYDOYOUNEEDTWOLLC’SANDACCORP?
A. Oneentityistheactualcannabisenterpriseholdingthelicense.
B. Theotherentityisthemanagementcompanyprovidinggoodsandservicestothecannabisenterprise.
C. Managementcompanymarksupthegoods&services,creatingahigherCOGS
D. Thethirdistoholdtheshareofthemanagementcompany.E. Lookup:Sec.1202SmallBusinessStockCapitalGains
Exclusion
TheTwo-BusinessRule
qCAUTION:Itmustbealegitimatebusinesstoclaimthedeductions,i.e.itshouldhaveitsownsetofbooks,itsowncorporatestructure,andarealrevenue/expensestream
CORPORATESTRUCTURE
WHICHONEISBEST?a. OperateasanIndividualb. Partnershipc. SCorporationd. LLCe. CCorpf. SCorp
TheTaxDilemma– 280E
Lastyear,44%ofcannabis-basedcompanieswentoutofbusiness
Mostfrequentreason?280E
280EDefined
- Involvesexpendituresinconnectionwiththeillegalsaleofdrugs
- Nodeductionorcreditshallbeallowed…incarryingonanytradeorbusinessifsuchtradeorbusiness(ortheactivitieswhichcomprisesuchtradeorbusiness)consistsoftraffickingincontrolledsubstances.
- THAT’STHEWHOLESTATUTE!
280EDefined(cont’d)
• CannabisisconsideredaSchedule1drug
• Thismeansnomedicaluse
• Consideredasdangerousasheroin
Inanutshell:NOBUSINESSDEDUCTIONSAREALLOWEDONYOURTAXES!
WHICHCANNABISBUSINESSESAREHITTHEHARDESTBY280E?
“IFYOUTOUCHTHEFLOWER,THEGOVERNMENTHASTHEPOWER!”
Dispensaries– hardesthitby280E.Growers– Notasbad,theycanattributealmosteverythingtoCOGS
Edibles/MIPS– Deceiving– youthinkthatthesugar,flower,ingredients,etc.areexpensesBUTTHEYARENOT.(“ortheactivitieswhichcomprisesuchtradeorbusiness”)asstatedin280Emeansyouhavetocapitalizethem
andnotexpensethem.TestingLabs– noworries.Theyarenot“trafficking”incannabis.
EXAMPLENormalBusiness:
Income:$1,000,000CostofGoodsSold:$500,000Rent:$100,000Payroll:$100,000AdministrativeExpenses:$100,000
Expectednetincomebeforetaxes:$200,000
EXAMPLE(CONT’D)Marijuanabusiness
Income:$1,000,000CostofGoodsSold:$500,000Rent:$100,000Payroll:$100,000AdministrativeExpenses:$100,000
Expectednetincomebeforetaxes:$200,000,right?
WRONG!
- Youcan’tdeductANYoftheordinaryexpensesofcarryingonabusiness,likerent,payroll,etc.
- Taxeswouldbebasedonnetincomeof$500Kinsteadof$200K=highertaxburden
INSUM….
Worried?YouShouldBe!
§ Howyousetupyourbookkeepingwilldetermineifyousurvive
§ OnlyADJUSTMENT(notdeduction)allowedisforCOGS
HOWYOUCANGETAROUNDTHIS?
ANSWER:AMANAGEMENTCOMPANY
HOWYOUCANGETAROUNDTHIS?
ANSWER:THREECOMPANIES
1. LLCOWNSTHELICENSE2. SECONDLLCISTHEMANAGEMENTCOMPANY3. C.CORPOWNSTHESHARESOFTHE
MANAGEMENTCOMPANY
HOWITWORKS
qManagementagreementtiesthemanagementcompanytothecannabisenterprise
q Bychargingmarkuponcapitalloanedtothecompany,providinggoods,services,etc.,youcangenerallycreateanextra10-18%hikeinCOGS
HOWITWORKS(CONT’D)
q Don’tletCOGSgohigherthan80-85%- thisisanautomaticaudittrigger
q IRSwillallowyoutocreateaformulaforcapitalizingCOGSandadjustingincome(it’snotadeduction)onyourtaxreturn
AUDITTIMEvExpecttobeauditedwithinfirstthreeyearsyou’reinbusiness
vCostaccounting,receiptsanddocumentationwilleithersaveyouordrownyou
vCostaccountingiscritical– allowsyoutojustifyyourCOGS
vSpeaktoaccountantortaxlawyerfamiliarwithcannabisenterprisestocreateyourchartofaccounts
AUDITQUESITON
If&WhenYouAreAudited,WhoistheProperPersontoRepresentMe,MyAccountantorMyLawyer?
ANSWER:YOURLAWYER
• Lawyersmaintainprivilegeovertheirclientsdocuments
• Accountantscanhavetheirworkpapers,taxcalculations,etc.subpoenaedbytheIRS
• ThiscanprovidetheIRSwithsufficientinformationtochargeyoubothcriminally&civilly
THETWOBUSINESSRULE
TWOBUSINESSRULEq Cannabisbusinesscansharesamespacewith
anotherbusinessthatis“legitimate,”andtakedeductionsforit
q Example:o Dispensarycanalsohostnutritioncounseling,patient
advocacy,caregivingservices,undersameroofo Thespaceused,electricity,personnel,etc.canbededucted
bythelegitimatebusiness
TAXTIPSCreateaformula…
q Consultyouraccountantortaxlawyer– nottheeasiestthingtodo,andit’scriticaltoyoursuccess
q Readupon280E– theremaybethingsyouforgottocapitalize
q FigureouthowtorelateanycoststoyourCOGS
THANKYOU!
