What You Should Know about Cannabis and Tax Reforms
December 22, 2017 is a very monumental day, due to the signing of PL-115-97, into law. This is perhaps the US tax code’s most significant overhaul since 1986. Following this, cannabis businesses ought to be in the know on how these tax laws affect their operations. Read on to discover some significant issues and how they impact cannabis businesses.
First, it is important to mention that IRC 280E never got repealed by the act. For most cannabis businesses, perhaps the greatest issue is IRC 280E’s impact. The delight of much of the cannabis industry, before the new tax law got enacted, some political advocates were at the forefront for IRC 280E’s repeal. A major reason for this was because I repeal could not fit Congress’ budget. Congress would have no choice but to replace lost revenue if it chose to budget the repeal as a tax cut. Paying less federal income taxes is among the benefits of this.
C corporations are a very attractive option now thanks to the act. The lowering of tax rates takes centre stage in GOP tax reforms. When figuring out the most suitable legal structure for cannabis business, the C corporation is a good option at the moment. Taxes for C corporations are required by law to be paid at the corporate level. Individual shareholders’ dividends then get subjected to up to 20% tax. In the past, people got discouraged from using C corporations due to such double taxation. The issue of double taxation gets mitigated by the act through reduction of the tax rate for C corporations to 21%. For dividends however, the tax rates remain unchanged under the new law. Apart from the reduction of tax rates, C corporations provide additional benefits such as shareholders’ audit protection and better flexibility in providing employee benefits. 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.
Following the new act, cannabis businesses now find passed through entities and limited liability companies less attractive. The most popular entity choice for people seeking to start businesses, cannabis or otherwise, is usually a limited liability company. For tax purposes, limited liability companies usually take on various forms however, the most common features are their incomes passing through to owners. Incomes that get passed through to owners or individual members are taxed at individual tax rates. The new law makes it possible for some individual members with passthrough entities to enjoy deductions of up to 20% on their business income.