Trying to cash in on the Green Rush could mean major tax issues

| May 25, 2021 | Tax Law |

Savvy entrepreneurs and business investors always want to catch the next big trend before it peaks. Entering a developing industry when there is demand but not yet a saturation of supply can be a recipe for profit.

People have called the legalized cannabis and CBD industries the Green Rush as a comparison to gold speculation that helped push settlement west. Seeing millions of dollars in revenue in an industry still struggling to establish itself can be a strong incentive to want to get involved. There are many opportunities, ranging from cultivation and product manufacturing to retail shops.

Unfortunately, especially for those who want to play a professional role in the production, processing, testing, transportation or sale of cannabis-related products, there are a lot of tax implications to starting a business in this rapidly growing industry.

Businesses have to comply with state and local tax systems

Legalization has led to a series of state-based taxation and regulation programs. When compared with other states that have better established Industries, New York clearly still has a long way to go. Those wanting to cultivate cannabis or open a dispensary will need to follow state permitting rules and ensure that they collect all of the necessary taxes levied by both state and local authorities.

Federal tax laws are a major hurdle 

The inability of the federal government to take authoritative steps on the rapidly growing cannabis industry creates all kinds of issues for entrepreneurs and established companies alike. Although the federal government does not recognize the legality of recreational cannabis, it expects companies and individuals who profit from the production or sale of cannabis and cannabis-related products to pay taxes on their revenue.

Often, these businesses have to pay a much higher overall tax rate because they do not qualify for all of the standard tax incentives and write-offs available to other businesses. When you combine these tax issues with the need for a cash accounting system due to banking limitations for the industry, there is a large degree of risk for oversights, errors and tax controversies.

Before you take any steps into this new industry, you need to make sure that you will comply with all laws, including tax laws, and plan for their impact on your company’s operating expenses.