Tax law is changing for the benefit of cannabis businesses in The Show-Me State with the passing of Missouri’s Marijuana Legalization Initiative. Not only did the passing of Amendment 3 open the door to recreational use, it also allowed Missouri to decouple from federal regulations regarding IRS Code Section 280E which penalizes traffickers of Schedule I or II drugs by disallowing the deduction of “ordinary and necessary” business expenses.
The result is significant tax benefits for Missouri cannabis businesses as they can now claim business deductions, including selling expenses, marketing expenses, and corporate overhead. If the current cost structure remains consistent, Missouri marijuana businesses should ultimately see more dollars to the bottom line. The Federal limitation for Section 280E remains in place, so these tax changes apply to Missouri state taxes only.
“In general, this is a very good thing for Missouri licensed marijuana operators because it allows them to operate under a similar tax environment as any other legal business operating in our state,” says David Smith, president of Smith Patrick CPAs and treasurer of the Missouri Cannabis Trade Association.
According to Smith, if a typical dispensary has $500,000 of expenses that are disallowed because of the provision of 280E at the Federal level, the new legislation will save the dispensary approximately $25,000. From a cash flow perspective, cannabis businesses that have paid estimates throughout the year based upon 280E limitations may be getting a sizable tax refund.
Actions to Take
Marijuana businesses need to track all expenses and ensure that accounting practices and systems are robust. In the past decade, the IRS has pursued targeted audits involving cannabis businesses. Now that cannabis operators can deduct expenses on Missouri returns, businesses must be able to support and justify the validity of these expenses with documentation. The easiest way to survive a tax audit is to be prepared in advance.
For more information about these new tax changes, visit here or call (314) 961-1600.