Page 4 - Feb 2020 Cannabis News Florida Newspaper

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Deductible Payroll Expenses for Cannabis Businesses

Leave it to the IRS to have successfully convinced For a cannabis cultivator, COGS not Utilize a payroll system or service that
written specific tax code for the court to allow only includes raw materials and supplies, can track and report labor costs by various
just about every profession cannabis companies to but also includes direct labor costs such as departments in addition to indirect/direct
and activity imaginable, both deduct expenses that planting, cultivating, harvesting, process- costs.
legal and illegal. Unfort - could reasonably be sep- ing, packaging, and anyone else who Utilize a payroll system that can allo-
unately, in the case of a state arated from the traffick- touches the raw product. Indirect labor, cate the related expenses along with the
legal cannabis-based business, ing of the drug from which can also be included in COGS, is wages, such as payroll taxes and employer
that falls under tax code their non-cannabis busi- the cost of any labor that supports the pro- paid benefits to the departments worked.
§280E which was written for ness activities. duction process but is not directly Utilize a time and labor system that can
trafficking illegal drugs. This The aforementioned involved in the active conversion of mate- track an employee’s labor by hours
1982 code states that “no examples highlights the rials into the final product, such as pro- worked in various departments.
deduction or credit shall be fact that the wages a duction supervisor, quality control staff Familiarize yourself with §263a as to
allowed for any amount paid cannabis company pays and materials management. For a what costs can be included in COGS.
or incurred during the taxable BY ROMEO CHICCO, their employees cannot cannabis reseller, the labor costs will be Utilize the services of professionals
year in carrying on any trade CPA be deducted from Gross minimal, but can include wages such as a who are familiar with this complex indus-
or business if such trade or Income to determine driver picking up and transporting the try.
business consists of trafficking in con- Taxable Income. Good news is that there product in for resale. The rules as to what Whether you have an existing business
trolled substances which is prohibited by is an exception to this. Deductions CAN is included are extensive and too lengthy or are looking to enter the industry, it is
Federal law.” be made for the cost of goods sold for this article, and can be found in IRS tax important to be well-versed in correspon-
Separating business segments now (COGS). T.C. Memo 2018-83 states that code §263a Uniform capitalization of ding tax codes, rules and exceptions not
becomes very important for businesses while ordinary business expenses related costs. only to be IRS-compliant, but to increase
that generate revenue through cannabis to a federally illegal business are disal- When it comes to payroll, here are the the profitability for your business.
sales. In T.C. Memo. 2018-83, the Tax lowed, they are allowed to deduct their lessons learned:
Court found that Altermeds, LLC, whose costs of goods sold. Maintain meticulous records in order Romeo Chicco, CPA, is President/CEO of
primary revenue source came from the Let’s look at an example of a non- to substantiate the COGS and support the PayMaster. For more information, visit
sale of cannabis, was not allowed to cannabis business compared to a cannabis gross profit reported from the sale of prod- www.paymaster.com.
deduct business expenses relating to the business in regards to income, taxable ucts.
sale of pipes and other paraphernalia income, the tax paid, and how COGS play
because it was seen as only a supplement a huge role (see chart below).
to their cannabis sales. One way As one can see in this example, the tax
Altermeds, LLC would have had a better due came out to be seven times higher for
chance at winning their case would have the cannabis business. Therefore, to mini-
been to create a second company and sell mize tax due and maximize net profit after
their other merchandise in a completely tax, the goal is to legally allocate as much
separate business. Another case in 2007, labor and expenses to COGS. COGS refers
Californians Helping to Alleviate Medical to the production costs for products man-
Problems, Inc. (CHAMP) v. Commis - ufactured and sold or purchased and
sioner, a medi cal marijuana dispensary resold by the company.

Cannabis News Florida cannabisnewsflorida.com February 2020 45