Or, how to report your cannabis earnings and stay on the up and up with the man!
December’s Women Grow networking meeting featured guest speaker Jon Rothenberg, a certified public accountant and cannabis-industry accounting and tax expert. Jon regaled us with his cautionary tales of cannabis-accounting gone wrong and how we can all avoid the common mistakes and pitfalls when filing.
“We will be audited more than any other industry!”Jon Rothenberg
“We will be audited more than any other industry,” said Jon, as he explained some ways to legally slide under the radar.
Industry novices sometimes make the mistake of simply not paying taxes, often out of fear of drawing unwanted attention from the feds. But, remember, Al Capone didn’t go to jail for murder, he went to jail for tax evasion. With more and more states ending prohibition, the IRS is looking to collect what’s due – even if it’s weed money. As Jon says, “We want everyone to be safe: Pay your taxes!” He doesn’t, however, recommend explicitly stating any connection to cannabis sales and production directly.
Jon has over 30 years of experience as a CPA, and he has been drilling down on financial issues important to the cannabis industry for about 5 years now. You wouldn’t necessarily know this from his website. This is on purpose and by design. It’s all about discretion and making your brand known without being too obvious. There are many generic ways to describe the production and sale of cannabis that do not specifically imply drug-trafficking. This applies to filling out your tax documentation, as well.
Those of us in the cannabis industry might not be aware of some of the common tax reporting pitfalls that can cause us to be on the IRS’s radar and can ultimately lead to audits. Cannabis-derived dollars require special reporting! U.S. Code § 280E has anyone in the cannabis industry on high alert! U.S. Code § 280E denies tax deductions or credit for those “trafficking in controlled substances.” U.S. Code § 280E has been interpreted by the courts to allow for the deduction of what is considered to be Cost of Goods Sold but does not allow selling, general and administrative expenses.
Anyone trying to accurately report their cannabis earnings must only report deductions related to cost of goods sold. Jon describes the importance of understanding how cost of goods sold affects your reporting. Cost of goods sold describes the costs associated with producing goods sold in a company. This includes materials and labor involved in production. Jon says, “Only deduct what can be classified as cost of goods sold”. This means the price of a product, the raw materials, freight, logistics, storage, labor, and factory overhead. As Jon clarifies, “Getting the product ready to sell is cost of goods sold.”
Jon is well-read in recent and relevant cases affecting taxpayers working in the cannabis industry. One pivotal case is Harborside, which will pay over 20 million dollars for deductions taken in error between 2007 and 2012. Harborside attempted to take deductions for activities that didn’t generate revenue, in an effort to deflect the impact of U.S. Code § 280E. The resulting wisdom is to report accurately the cost of goods sold in producing and selling cannabis.
In addition to educating Women Grow members about stress-free tax reporting, Jon also outlined some good rules of thumb when interpreting financial statements. Jon’s mantra is “compare, compare, compare”, and this applies to reading financial statements from year to year and quarter to quarter in order to spot trends. Jon’s website includes lots of handy tools and resources to help us navigate the complicated world of balance sheets, income statements, and statements of cash flow. There are also calculator tools to explore interest-earning and savings opportunities.
“CPAs are awesome!” said Jon as he introduced the rest of his team of delightfully enthusiastic colleagues. Our Women Grow audience agreed, CPAs are awesome! Who else has the time to devote to studying financial documents on such a granular and global level? CPAs like Jon and his associates are able to demystify financial statements, and explore your specific opportunities to benefit from tax law. And for those of us cannabis industry insiders, Jon will keep us safe from the man as we roll up to tax time.
Learn more about J.D. Rothenberg & Associates and how they can help you become financially strategic!
Article for Women Grow, December 2018, Eva Morrigan