For newly legal cannabis companies, tax compliance often feels like wandering through a dense jungle filled with pitfalls. Complex regulations, high tax rates, and the IRS 280E provision result in maze-like accounting needs. Without the right guidance, missteps can lead to major fines, lawsuits, or even the closure of your cannabis business. Fortunately, with the right partner, you can navigate the cannabis tax jungle seamlessly. In this expanded post, we explore how Monarch’s cannabis tax software helps you thrive in the cannabis regulatory environment.
The Rapid Expansion of Legal Cannabis
The past decade has seen the legal cannabis industry explode from a few medical-only states to a booming $30+ billion market spanning 37 states today. This growth has been driven largely by increasing public acceptance and demand for legal access to cannabis products. According to 2021 Gallup polling, 68% of Americans now support full federal cannabis legalization, a record high.
As more states have legalized medical and recreational cannabis, companies are seizing opportunities and generating significant tax revenue. California collected over $1 billion in cannabis tax revenue in 2021, while Colorado has surpassed $2 billion in total tax revenue since 2014.
Cannabis tax income is funding important state programs like education, infrastructure, and drug treatment programs.
However, this green rush also carries major accounting and compliance challenges that can trip up cannabis entrepreneurs. Navigating this complex regulatory jungle requires specific strategies and tools.
Key Cannabis Tax Compliance Challenges
IRS Tax Code 280E Headaches
One of the biggest obstacles for state-legal cannabis companies is IRS tax code 280E, which prohibits deducting normal business expenses from federal taxes. This can lead to crippling effective tax rates of over 60% for profitable cannabis businesses. While efforts are underway in Congress to reform 280E, it remains a significant burden in 2022. Navigating 280E requires careful tax planning and documentation.
Complex State & Local Cannabis Taxes
In addition to IRS rules, cannabis businesses must grapple with a shifting patchwork of state and local cannabis taxes that vary widely across jurisdictions. Excise taxes, sales taxes, and regulatory fees are common. Some states also mandate seed-to-sale tracking and set THC potency taxes. Keeping up with new requirements takes considerable resources.
Heightened Audit & Penalty Risks
Due to federal illegality, cannabis businesses face heightened tax audits and penalty risks that can quickly jeopardize their license and livelihood. For example, Section 280E audits often result in multi-million dollar tax bills tied to denied business expense deductions. Without meticulous documentation, audits can spell disaster.
How Monarch Guides You Through Your Tax Challenges
Automating METRC Compliance
Most states use METRC as their cannabis track-and-trace system to monitor inventory and prevent diversion. While essential, integrating METRC manually with retail operations is time-consuming and error-prone. Monarch seamlessly syncs data between METRC and your point-of-sale (POS) to eliminate dual data entry. Sales and transfer data flow directly into METRC, supporting continuous compliance.
Optimizing Your Taxes Despite IRS 280E
While IRS 280E prevents deducting normal business expenses, with the right strategies, you can minimize its impact. Monarch helps you accurately calculate and document the cost of goods sold (COGS) to maximize deductions. We also guide you in separating business entities and taking advantage of state tax deductions. With Monarch as an ally, 280E compliance becomes achievable.
Staying Current on Changing Regulations
Cannabis laws and taxes vary drastically between states and are constantly shifting. It’s challenging for cannabis companies to stay up-to-date while running day-to-day operations. Monarch’s tax software seamlessly adapts to changing requirements so that you can focus on your business. Our compliance experts monitor regulatory changes across the country to ensure your tax workflows are always current.
Providing Audit-Ready Tax Reporting
During cannabis tax audits, companies must provide extensive documentation covering sales, inventory, and taxes. Without robust records, audits can lead to major penalties or criminal charges. Monarch generates detailed, audit-ready tax reports that document your financial data, tax calculations, and compliance with regulations. Our automated record-keeping gives you confidence during audits.
Conclusion
Thriving in the cannabis industry requires cutting through complex tax regulations and obstacles like 280E. With Monarch as your ally, cannabis tax compliance becomes simple, automated, and audit-proof. To unleash your full potential, partner with the leader in cannabis tax software. Schedule a demo with Monarch today to explore how our platform can guide you through your cannabis tax challenges.