A lot of responsibilities come with owning a cannabis business that you probably continuously find out along the way. The list is extensive and undoubtedly becomes longer as your business grows. Your tax records are one item you must always keep sight of. You never want to expose your cannabis business to an IRS audit in this industry, well, in any industry. The experts at Redbud Advisors explain the best practice for keeping cannabis tax returns.
We bet you already know this by now but the cannabis industry has intricate tax rules you must follow closely. This industry is heavily regulated and ruled by Internal Revenue Code 280E due to the classification of cannabis. Even if you never use Redbud Advisors as your cannabis accounting firm, we highly recommend getting an accountant that specializes in cannabis taxes to help guide you- this is the best way you can try to prevent an audit from the IRS.
Now that we have that out of the way let’s get into why it is important to keep all your tax returns.
First off, it is just good business practice to keep documentation of your tax returns. This can come in handy in the future, especially if you need to file an amendment. Keeping these documents year over year will assist in monitoring business progress as well.
The IRS examines tax returns by cannabis businesses closely since this industry is mostly made up of cash-based businesses. And because cannabis is not federally legal. This combination in itself is the reason this industry is under a microscope with the IRS. If proper accounting isn’t in place it can be easy to report all cash in and out on tax returns inaccurately. Hence why auditors are meticulously reviewing your tax returns.
Not only do cannabis businesses need to keep tax returns but all tax records. If you are ever audited you will be able to provide a paper trail for all cash in and out of your business. This is sound advice for any business in any industry.
Below is a timeline of how long to keep your tax returns from the cannabis tax experts here at Redbud Advisors.
Best Practice for All Businesses
Business owners must keep all tax returns including amendments for at least three years from the original date the return was filed.
Another option is keeping your tax returns for two years from the date you paid the taxes if you filed a claim for credit or a refund after you filed your original tax return.
These options are the standard best practice for any business.
Keep Tax Returns for 7 Years If…
Did you file a claim for a loss from worthless securities or bad debt deduction? If so, you need to keep these records for 7 years.
Not sure what this is or if you filed a claim. Let us explain.
Worthless securities are bonds, stocks, and other holdings that do not have any market value. You can complete part I or II on form 8949 to report worthless securities.
A bad debt is basically a debt that is deemed to be totally or partially worthless. This situation, potentially, can give you the option to deduct the amount of the bad debt by completing form 1040.
Chances are if you aren't sure you filed this type of claim you probably didn't but it never hurts to double-check. This is a perfect example of why keeping tax returns is important.
As always, we advise speaking with a cannabis accountant before making any claims for your business to ensure you are eligible and in compliance.
Employment Tax Records
All employment tax records need to be kept for at least 4 years. This is from the date the tax is due or from the date you paid the tax.
Basically, you will need to have the employee's entire compensation record available for the IRS to review if requested. This includes regular wages, sick wages, tips, and a copy of the employee's W-2.
Other Tax Record Timelines That Hopefully Do Not Apply to Your Cannabis Business
We say this all the time- keep your cannabis business audit ready. Seriously, this is the best defense against the IRS. The industry you are in is highly scrutinized. We hope the list below does not apply to you because if it does your cannabis business will more than likely be on the audit list.
Not reporting income to the IRS- You will need to keep your tax records for 6 years if more than 25% of your gross income is not reported on your tax return.
You will need to keep your tax records indefinitely if you;
Don't file a tax return at all.
File a fraudulent return.
The Redbud Advisors team highly advises against all the options above. We recommend filing all tax returns in their entirety and on time.
Make sure to talk with a tax professional before doing any of these options above, they really aren’t good ideas. If your tax professional ever advises filing a fraudulent return, dump them and find a new tax professional.
Conclusion
The best practice is to keep all basic tax returns for at least three years from the date the return was filed or the date the taxes were paid, whichever is the latter. Follow all guidelines for keeping your tax returns and all other tax records because you never know when an audit might be right around the corner.
If you ever find your cannabis business in a tricky situation with your tax return or record keeping, always seek professional advice. There are very few situations that warrant a business to forgo filing a tax return and almost none of them apply to cannabis businesses.
The Redbud Advisors team is always available to help with the complexities of the cannabis industry taxation. After all, we are experts and specialize in this industry. You can give us a call at 866-830-5144 or send an email to hi@redbudadvisors.com.
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