Psycon Las Vegas 2024

Psycon Las Vegas: Navigating Tax Challenges in the Psychedelic Industry

by Psilocybin Industry Accounting
Taxation Challenges in the Psychedelic Industries

At the recent PsyCon Convention in Las Vegas, Justin Botillier of Calyx CPA based in Medford, Oregon, delivered a critical presentation addressing the intersection of taxation challenges within the cannabis and psychedelics industries. With deep expertise in cannabis taxation, Justin offered insights that are particularly relevant to both sectors, especially regarding IRS Section 280E.

 

Understanding IRS Section 280E and Its Broad Implications

The core of Justin’s presentation centered on IRS Section 280E. Initially implemented during the war on drugs in the early 1980s, Section 280E prohibits businesses involved with Schedule I or II controlled substances from deducting typical business expenses, except for the Cost of Goods Sold (COGS). Justin detailed how this section affects the psychedelics and cannabis businesses, creating significant financial hurdles due to the inability to deduct ordinary business expenses.

 

Insights for the Psychedelics Industry

While he put much focus on cannabis, Justin effectively bridged the conversation to include the psychedelics industry, which faces similar challenges and uncertainties regarding taxation and regulation. As the psychedelics sector continues to evolve, understanding the application of tax laws like 280E becomes crucial for business owners and investors within this space.

 

Strategic Tax Planning for Cannabis and Psychedelics

Bifurcation Strategy

Justin outlined a bifurcation strategy recommended by other professionals working in the psychedelics space to mitigate the tax burden of 280E. By splitting operations into two entities — one for plant-touching activities and another for non-plant-touching activities — businesses can optimize their tax filings.

Single Entity Strategy

For businesses that prefer a unified operational model, Justin discussed the benefits of a single-entity strategy, emphasizing rigorous accounting practices to allocate costs properly and maximize allowable deductions excluded by 280E. This approach requires a solid understanding of IRC Section 471c, which he explained in detail, demonstrating how careful inventory costing can shield a business from excessive tax liabilities.

 

IRC Section 471c: A Tool for Compliance and Optimization

Explaining the nuances of IRC Section 471c, Justin highlighted how this section allows for greater flexibility in accounting for inventory costs, thereby increasing deductible COGS. This is vital for both cannabis and psychedelic businesses seeking to navigate the limitations imposed by 280E effectively.

 

Anticipating Future Legal and Regulatory Shifts

Justin speculated on potential shifts in drug policy and legal frameworks that could impact the application of 280E to both cannabis and psychedelic businesses. He discussed possible rescheduling efforts and new regulatory developments, suggesting that changes in the legal landscape could mitigate some of the current challenges faced under 280E, beyond just rescheduling cannabis.

 

Expert Guidance for Navigating Complex Tax Landscapes

Concluding his presentation at PsyCon, Justin Botillier emphasized the importance of engaging with tax professionals who specialize in cannabis and, increasingly, in psychedelics. As the regulatory environments evolve, his insights into effective tax planning provide a roadmap for businesses to navigate these complex fields while maintaining compliance and optimizing financial outcomes.


Justin warns that beyond concerns about the ramifications of IRS audits, companies operating in “trafficking” businesses need to be extremely careful about whom they choose to file tax returns. More often than not, it is the accountant who will mire their clients in tax debt rather than the IRS.

ContactUs

Simply fill out the form and we will be in touch to answer any of your queries, 

And feel free to check out our blog & video Section for more info.

INTERVIEWING BRITT ROLLINS, CEO OF THE NATIONAL PSYCHEDELICS ASSOCIATION

by Psilocybin Industry Accounting

Navigating the Psychedelics Industry: How the National Psychedelics Association is Pioneering Change

The Psychedelics Industry, once a fringe sector, has rapidly evolved into a significant area of interest for both investors and healthcare professionals alike. At the forefront of this burgeoning industry is the National Psychedelics Association (NPA), a pioneering body dedicated to facilitating the growth and regulatory navigation of psychedelic-related businesses. The NPA plays a crucial role in addressing both the opportunities and challenges encountered by those within this space, particularly in relation to financial services, business solutions, and legislative advocacy. This article delves into the comprehensive efforts of the NPA to support the psychedelics community and foster an environment conducive to the sector’s sustainable development.

Introduction to the National Psychedelics Association

The National Psychedelics Association (NPA), established with the vision of supporting the evolving needs of the psychedelics industry, serves as a beacon for those navigating the complex landscape of psychedelic substances. With a focus on promoting safe, ethical, and legal access, the NPA provides invaluable resources, including regulatory guidance, business support, and educational services. As the industry burgeons, the association’s role in uniting businesses, researchers, and enthusiasts becomes increasingly vital, ensuring the psychedelic movement progresses with integrity and professionalism.

Challenges with Banking and Financial Services

One of the most pressing obstacles faced by businesses within the psychedelics industry is the limited access to banking and financial services. Given the legal ambiguities and evolving regulations surrounding psychedelics, many financial institutions are hesitant to engage with businesses in this sector. This hesitancy can stifle growth, limiting companies’ abilities to secure funding, process payments, and manage operations efficiently. Recognizing these challenges, the NPA actively works with stakeholders to bridge the gap, advocating for clearer regulations and fostering relationships with financial institutions open to supporting the industry.

Efforts to Provide Business Solutions

In response to the unique demands of the psychedelics market, the National Psychedelics Association has embarked on a mission to deliver targeted business solutions. These efforts include offering strategic advice, facilitating networking opportunities, and providing insights into best practices for navigating the market. Furthermore, the NPA is instrumental in advocating for changes that could alleviate some of the financial and operational burdens on businesses, aiming to cultivate a thriving and competitive industry landscape.

Support for Service Centers

Service centers, such as therapeutic clinics and research facilities, constitute a critical component of the psychedelics ecosystem. The NPA recognizes the challenges such establishments face, from regulatory hurdles to logistical complexities. To address these issues, the association offers tailored support encompassing regulatory compliance, staff education, and community-building initiatives. This comprehensive approach ensures that service centers can deliver their invaluable services effectively and within legal bounds.

Guidance for Industry Professionals

The evolving landscape of the psychedelics industry necessitates continuous learning and adaptation by its professionals. The National Psychedelics Association acknowledges this need by providing a plethora of educational resources, workshops, and seminars geared towards enhancing the knowledge and skills of industry participants. By equipping professionals with the latest information on legislation, research, and market trends, the NPA empowers individuals to navigate the industry with confidence and contribute positively to its development. In conclusion, the National Psychedelics Association stands at the vanguard of the psychedelics movement, tirelessly working to address the sector’s multifaceted challenges while promoting growth and innovation. Through its comprehensive support services and advocacy efforts, the NPA is pioneering change, laying the groundwork for a future where the psychedelics industry flourishes, benefiting individuals and society at large.
calyx cannabis

COULD RESCHEDULING CANNABIS POTENTIALLY SET BACK FEDERAL LEGALIZATION BY DECADES? 

by CANNABIS INDUSTRY ACCOUNTING
calyx cannabis

It appears that cannabis is on track for rescheduling by the end of 2024. However, the primary benefit we anticipate for our clients is the elimination of the 280E tax burden. The author of ‘Congresswoman Says Marijuana Rescheduling Could Set Full Federal Legalization Back ‘Another 50 Years’,’ published by Marijuana Moment, raises a compelling argument.

Fortunately, by employing strategies such as the 471(c) inventory method over the past decade, Calyx CPA has managed to save our clients tens of millions in taxes. This has been achieved by substantially reducing the amount of phantom income reported due to 280E, bringing our clients’ tax liabilities closer to those of fully legal businesses. Therefore, should the industry continue to focus its efforts towards achieving full federal legalization instead of settling for the short-term reward of rescheduling? This decision is more than a mere strategy; it represents a critical juncture that could significantly influence the future of the industry.

The author suggests that if the industry shifts its focus away from fighting 280E but secures some other form of federal recognition, it might still confront financial challenges. However, any federal change could offer benefits such as improved access to banking and increased investor confidence, which could potentially outweigh the ongoing tax issues.

In contrast, the prospect of full federal legalization presents a comprehensive solution. It aims to address a wide range of issues, including the repeal of 280E, simplification of banking processes, normalization of tax treatments, and resolution of legal uncertainties. The potential benefits are substantial, ranging from increased investments to advancements in research. However, achieving this requires widespread congressional support and alignment with federal policies, presenting a challenging and potentially prolonged endeavor.

Faced with this dilemma, the cannabis industry must consider the immediate advantages of a partial legislative victory against the long-term benefits of full legalization. This decision hinges on an assessment of the political landscape, the immediacy of the industry’s needs, and its long-term objectives.

In conclusion, the direction chosen by the cannabis industry at this crossroads will profoundly impact its future. This decision necessitates not only a deep understanding of the legislative environment but also a clear vision for the industry’s future. As the cannabis sector continues to expand and mature, the path it takes now could define its role in the economy and society for many years to come.

 

https://www.marijuanamoment.net/congresswoman-says-marijuana-rescheduling-could-set-full-federal-legalization-back-another-50-years/?

marijuana_business_inventory

HOW DOES INVENTORY INCREASE NET INCOME?

by Accounting Tips

I had a client inquire about why an increase in inventory increased their net income. I explained that for most businesses purchasing products for resale, as well as supplies and materials, typically categorize these items as ‘Cost of Goods Sold’ (COGS). COGS directly offsets gross income and subsequently reduces net income.

However, at the end of the financial year, often accountants request clients to report their ending inventory. Once this is reported, accountants reallocate funds from COGS to the inventory on the balance sheet. This adjustment lowers the COGS, thereby increasing net income. This adjustment can often surprise business owners, particularly in their first year of operation when inventory is being accumulated for the first time.

A significant point to note is that businesses often have substantial funds tied up in inventory. However, they cannot deduct the cost of this inventory until it is sold, which might be in the following year. This leads to a situation where they might have to pay taxes on income despite having low or negative cash flow. A practical tip is to minimize inventory accumulation towards the end of the year and consider replenishing it at the beginning of the next year.

Notably, as of this recording, most businesses are not required to report inventory if their gross revenue is under $29 million. If your business falls under this threshold and your accountant still asks for inventory reporting, it might be wise to get a second opinion as to whether it is necessary to report inventory.

An exception exists for certain industries, such as the cannabis industry, which are subject to specific regulations like Section 280E. In these cases, businesses are required to report inventory as they use particular methodologies that capitalize COGS to inventory, allowing them to deduct otherwise non-deductible expenses.

Businesses with revenues under $29 million can generally employ the cash method of accounting, which permits them to write off purchases for resale, supplies, and materials as COGS and benefit from these deductions in the year they occur.

Assete write off

WHAT KIND OF ASSET CAN I WRITE OFF?

by Accounting TipsBusiness

As a tax planning strategy, particularly towards the end of the year, a common question from clients is: “What can I buy to decrease my tax liability?” Many consider purchasing vehicles or making down payments on properties or building facilities. However, it’s important to note that there are limits. For example, buying real estate, including land and building, doesn’t usually offer immediate tax deductions. In fact, down payments on property in and of itself don’t qualify for immediate deductions.

The main category of assets eligible for immediate depreciation (sometimes called ‘bonus depreciation’) includes equipment that can be described as losing value upon purchase and is also not permanently affixed to a building or property. This category encompasses a wide variety of assets, from computers to tractors, dehumidifiers, trimming machines, and even essential building equipment like appliances.

For vehicles, to qualify for bonus depreciation or 179 deductions, they must have a demonstrable and primary business use. Purchasing cars for tax write-offs is often risky if they are not used exclusively for business. For instance, vehicles must be used over 5% of the time for business purposes to be eligible. If this percentage drops, the IRS may require you to recapture formerly deducted depreciation. If business use is less than 50%, consider opting for taking a mileage deduction (currently at $0.65 per mile), which is safer. For business owners, reimbursing oneself for mileage from the business for the use of a personal vehicle is recommended. This reimbursement is non-taxable and counts as a business expense. Remember that these business miles must be meticulously recorded for the deduction to be substantiated.  

Land, on the other hand, is not depreciable. It generally appreciates in value, and the IRS doesn’t allow depreciation as it’s seen as a cash-for-property exchange without actual value loss. Residential rental properties can be depreciated over 27.5 years and commercial buildings over 39 years, but these are long-term deductions and don’t offer much immediate tax relief.

Remember, specific equipment, such as above-ground irrigation systems, that aren’t permanently attached to the property can also qualify for bonus depreciation. Investing in equipment can be a smart tax strategy, especially if these are items you plan to purchase regardless.

admin-ajax

471(C) & 280E

by Accounting Tips

Most business owners in the cannabis industry know of 280E and have at least a basic understanding of what it is. If 280E is still a mystery, one only needs to “Google it” to find information about it and its potential impact on a business’s tax liability. What isn’t commonly available is information on how to address it.

Years ago, as states started to legalize cannabis, the accounting industry went to work attempting to figure out what the cannabis industry would do about 280E because it made doing business in the cannabis industry painful, if not impossible. Most poignantly, dispensaries, especially those with a low gross profit whose overhead expenses were proportionately much higher than those with large gross profits whose overhead represented a smaller portion of their overall cost. Low gross profiting dispensaries would regularly experience effective tax rates in the 80 and 90 percentiles. This could quickly mire a business owner in tax debt within a year of starting their business. This scenario is still the story for most dispensary owners. Unfortunately, most accounting professionals are still unaware of these consequences, and new business owners often fall victim to uninformed decision-making by their accountants.

Well before the Tax Cuts and Jobs Act, accountants specializing in the cannabis industry quickly discovered IRC section 471. They developed a methodology allowing them to, at least in part, deduct overhead expenses that would otherwise be disallowed. Accountants would encourage their dispensary clients to incorporate manufacturing activities within their businesses, including weighing, packaging, and value-added processing, to tie their facility and payroll expenses to their inventory so that at least a proportion of their otherwise disallowed costs could be capitalized to inventory and deducted. Over the years, even in audits, IRS agents allowed reasonable use of this methodology. However, these companies continued to pay absorbent effective tax rates because the business could still not deduct most of their expenses.

In 2018, the Tax Cuts and Jobs Act was passed, and 471(c) superseded 471(a). 471(c) was Congress’s attempt to simplify the inventory requirements for small businesses, and simplify it, it did. For companies with a gross income of 25 million dollars (currently 26 million) or less, it allows management to choose whether it wants to track and report inventory. 471(c) further states that a company can calculate its inventory based on its “books and records.” Therefore, any business with a gross income under 25 million dollars can calculate inventory however it sees fit, including capitalizing overhead. For example, if a business wants to include 100% of its payroll and facility costs in its inventory calculation, it could do that if it is based on the company’s books and records.

When tax attorneys and accountants discovered the loophole, we high-fived and chest-bumped one another. Between 2019 and 2020, those paying attention had a free-for-all using 471(c) to deduct our clients’ expenses. For businesses operating in the cannabis industry, especially for dispensaries, 471(c) significantly reduces the impact of 280E. Unfortunately, some accountants were too enthusiastic and started making videos and blog posts stating, “280E is dead.” Then the “powers that be” started paying attention. The entity that oversees the IRS, the Treasury Inspector General for Tax Administration (TIGTA), got word that the cannabis industry was using 471(c) to avoid paying taxes. It pressured the IRS to do something about it. As a result, in January of 2021, the IRS passed regulations that “…nothing in section 471(c) permits the deduction or recovery of any cost that a taxpayer is otherwise precluded from deducting or recovering under any other provision in the Code or Regulations.” This translates to if you are subject to 280E, you can’t use 471(c) to avoid paying taxes.

Early on, attorneys and accountants in the cannabis industry explored another code section called 263A. This code section explicitly states that if a taxpayer is disallowed deductions under another code section, they are not allowed to use 263A to capitalize overhead expenses to inventory. Therefore, 263A is not used by the cannabis industry. The critical difference here is that the flush language of 263A was appended to the code, while the IRS wrote 471(c) language into regulation. Regulations are a form of guidance issued by the IRS meant to interpret and give directions on complying with the tax law. The IRS has the authority to issue regulations; however, they are essentially an opinion of the IRS. Fortunately, for businesses subject to 280E, the IRS does not write the tax code; Congress does. Therefore, many professionals in the cannabis industry believe the IRS may have overstepped.

Please note that the fastest way to ruin 471(c) for your clients and everyone else is by attempting to write off all overhead expenses, thereby avoiding the impact of 280E entirely. We do not recommend kicking the hornet’s nest. Instead, we recommend developing a narrative that justifies why you are capitalizing overhead expenses to inventory other than to avoid 280E.

So we will leave it up to you and your accountant to decide how conservative or aggressive you want to be with your deductions. According to 471(c), your cost of goods sold can include otherwise disallowed deductions if they reflect your books and records. One thing is for sure, doing nothing to mitigate 280E is a mistake and very costly. If your accountant is unwilling to take an approach, they are far more likely to end up miring you in tax debt before the IRS does. So rather than fearing the IRS, it would be best if you considered the accountant you are using.

admin-ajax (1)

280E AND PROPER BUSINESS STRUCTURES

by Accounting TipsCANNABIS INDUSTRY ACCOUNTINGPsilocybin Industry Accounting

Businesses subject to Internal Revenue Code Section 280E must choose their business structure carefully. In this article, I will describe the pros and cons of each structure, and provide recommendations for specific business types within the cannabis and psilocybin industry.

LIMITED LIABILITY COMPANY (LLC)

The Limited Liability Company (LLC) is now the most recommended legal structure. Many people automatically confuse LLCs with being synonymous with partnerships and, at one point, this was true. However, about 20 years ago, awareness started to change and now LLCs are considered for multiple tax treatments. For example, the LLC can be taxed as a sole proprietorship or disregarded entity, partnership, S corporation, or C corporation.

PARTNERSHIPS

Partnerships should only be considered when holding assets for investment purposes or when the ownership structure necessitates it. Partnerships are the most flexible tax structure allowing diverse ownership types, capitalization, and distribution activities. However, it is a pass-through entity in which the business’s income is taxed at the partner level, the income can be subject to self-employment tax and, due to the relatively new Partnership Audit Regime enforced by the IRS, when partnerships are audited they can be charged tax at the partnership level at the highest individual income tax rates. For this reason, we don’t recommend partnerships unless it is necessary.

S CORPORATION

Most small businesses qualify to elect to be taxed as an S corporation if they choose. Like the partnership entity structure, the S corporation is a pass-through entity, meaning the business’s net income is taxed at the shareholder level. However, if appropriately managed, the S corporation can be more tax favorable than a partnership or C corporation. For example, the S corporation business entity must pay its officers a “reasonable wage,” subject to payroll taxes. But unlike partnership distributions, distributions paid from an S corporation are not subject to the 15.3% self-employment tax.

For this reason, the S corporation is the preferred entity structure for small businesses. For most companies in the cannabis and psilocybin supply chain, the S corporation is typically ideal. However, a pass-through entity is not recommended for companies with a significant 280E impact, specifically retailers or service centers.

C CORPORATIONS

C corporations should be considered before other entities operating in a federally illegal business, specifically those in which 280E applies. Tax is assessed at the business level, and business returns are prepared independently of the shareholders’ tax returns. In addition, due to its current Federal tax rate of 21%, it can be more tax favorable for business owners subject to higher individual tax rates. But most importantly, if a tax adjustment results in significant tax debt, the corporation is siloed from the shareholders. The corporation is responsible for the tax debts imposed by the taxing authorities, not the owners.

There is frequent pushback when suggesting the use of C corporations. There is a concern over double taxation in that C corporations pay tax on their earnings and then again when those earnings are paid out in the form of dividends. There is potential for double taxation, but those results are typically due to the mismanagement of the corporation funds or the lack of tax planning. The C corporation is only subject to the potential of double taxation when the ownership is attempting to extract value from it. Otherwise, the income of a C corporation will be taxed only once.

Most business owners intend to expand their operations and business holdings. The corporation’s earnings can be used to expand operations, purchase additional assets, or lend to other companies. Therefore, they are not likely to be subject to double taxation during the growth phase of their development. The risk of double taxation happens when the shareholders attempt to extract value from the company. Fortunately, with some planning, there are various ways that earnings can be paid out to avoid being taxed a second time. For example, value can be extracted as compensation through the payroll system or paid out as management or consulting fees; it is common for corporations to give bonuses to key employees that are also shareholders. Often the shareholders of a corporation will set up consulting or management companies that provide services to the corporation in return for fees; shareholders can be paid for simply being on the board. Finally, paying rent is a common way of extracting value without being double-taxed. The corporation leases real estate, human resources, or equipment from companies the shareholders may also own.

An ideal structure, we recommend, is to have your trafficking operations included as a C corporation and your real estate holding company structured as a partnership. Furthermore, I recommend that your real estate company do as little commingling of activities with your operating company as possible. For example, it is common practice for the real estate holding company to provide land and leasehold improvements to customize the property to address the operating company’s needs. This activity could cause the holding company to be considered “in the service of” trafficking. Therefore, to help reinforce the holding company’s position that it is simply a real estate investment company and not in the business of trafficking, we recommend that “build-outs” and other related activities be paid from the operating company and included in the operating company’s bookkeeping.

Selecting the proper business structure is vital for the success and growth of any company, especially for those operating in federally illegal businesses. While no one-size-fits-all solution exists, companies can optimize their structures with proper guidance and planning to balance their compliance, flexibility, tax, and risk mitigation needs.