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What Cannabis Business Owners Should Know about Tax Reforms

December 22, 2017 is a historical day, when PL-115-97 commonly known as “the act” or the tax cuts and jobs act got signed into law. Since 1986, this is arguably the US tax code’s most significant overhaul. Cannabis businesses therefore are supposed to be in the know on how these new tax laws affect their operations. Below, we look at some significant issues that impact cannabis businesses.

Before going any further, it is important to make it clear that this act never repealed IRC 280E. The impact caused by IRC 280E is perhaps the most significant tax issue for most cannabis businesses. Before the new tax law got enacted, some political advocates supported the repealing of IRC 280E, which was good news for most of the cannabis industry. A major reason for this was because I repeal could not fit Congress’ budget. Congress would be forced to replace lost revenue if the repeal were budgeted as a tax cut. Paying less federal income taxes is among the benefits of this.

C corporations are now more attractive thanks to the act. In GOP tax reforms, the centrepiece is reduction of tax rates. At the moment, C corporations are good options when determining a cannabis business’ legal structure. The corporate level is where C corporations are required by law to pay taxes from. Individual shareholders then have their dividends taxed at rates of up to 20%. C corporations were often not preferred by many people in the past due to such double taxation. The act solves this issue of double taxation by lowering the tax rate for C corporations to 21%. However, tax rates for individual shareholders’ dividends remain unchanged under the new law. Besides the reduction in tax rates, there are other benefits to see corporations for instance enhanced flexibility in providing employee benefits and shareholders getting audit protection. Due to change in the law, cannabis businesses are encouraged to review their operating structures at the moment and consider whether they should become a C corporation.

The new act makes passed through entities and limited liability companies less attractive for cannabis businesses. Limited liability companies are the most popular entity choice for people starting businesses, cannabis or otherwise. For tax purposes, limited liability companies usually take on various forms however, the most common features are their incomes passing through to owners. When incomes get passed through to owners or individual members, they are subject to taxation at individual tax rates. Deductions of up to 20% on business income can be enjoyed by individual members owning passthrough entities, courtesy of the new law.

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