The Right Corporate Structure for Cannabis Businesses
Two business examples and the five top tips regarding structuring your business are the topics of this blog post.
So, we already know the history of section 280e and how it got implemented in congress in 1982. Congress then decided that if a person conducts an illegal activity at the federal level, only the cost of goods sold is allowed deduction.
There are some exceptions to that rule when assigning certain expenses, and in this blog post, we are unfolding different strategies to go about them.
Let's say there is company #1, divided into two sections, one called RETAIL, and the other CARE. Within retail, they sell smoking, shirts, snacks, drinks, etc. Within CARE goods, they have the cost of goods sold, storage, and inventory/point of sales systems. Your company then must determine the commodity structure to deduct those as part of the cost of goods sold for the tax evaluation from the IRS's perspective is the entire entity because the company created one legal entity to do two different service lines.
So, let's look at option #2, where we have two companies under the same umbrella. Company X stands for the retails concerning smoking, shirts, snacks, beverages, etc. Additionally, establishment Y stands for the COGS, storage, inventory/POS. One obscure topic that companies rarely discuss with their clientele is the shared service agreement.
Let's keep in mind, there is a target on your back as soon as you start to work with illegal substances of any form, but these tips will make it much easier for you and your company.
Let me explain why publicity traded companies use this all the time to shift tax burden between companies.
How it works: there is an agreement between two companies and the services. Meaning staff from company X can help company Y with storage and inventory, etc and the goal with the shared services is to shift some of those cost burdens of goods sold to where they should be until 280e gets revamped. This tax strategy can be the key to your business flourishing, and we can help you set up a plan.
Top 5 tips
So, knowing that the IRS is looking for sources of revenue and given the current administration, there are five tips that we would recommend when you are looking for help.
The first thing to dive into and decide on is the corporate structure you want to work in. Whether you choose a C, S, or LLC, that is something we can guide you across and help you choose depending on your welfare and what you are scrutinizing for in your corporate. We will go through the tax system, bookkeeping, and objectives for each one.
Second, innovate your enterprise and bookkeeping, and think about the future of where the cannabis industry steers. Recall that a huge stake heads toward subscription-based revenue, which means: creating loyalty towards your clients to innovate and build on your business to have that type of steady revenue. It is a vital point.
Third, find the best grant model that fits your business idea. There are a lot of do's and don'ts, and more than the two models shown above where companies can use different strategies to shift those Costs into COGS. Therefore, we recommend that you sit down with us and have a talk about your current and future thoughts. We are about helping your business evolve, so let us help you.
Fourth, pick the right accounting help service for both the inventory and the IRS. Most CEOs have a strategy with all of their data regarding the company. If you have a solid presentation of what your business stands for, you can easily present yourself to critical baker's investors. Sometimes it even makes it easier for new potential partners who would like to expand the business together. When others see that you have a clean and organized plan, where there are no possible loopholes for anything or anyone to come after you, your business is set for success.
Fifth, be audit ready and keep in mind the IRS will always have you as a target. Since this industry is one of the toughest to be in, let us help you with any further questions. Feel free to contact us here.