Since there are so many risks associated with owning a cannabis company that handles the actual marijuana plant, it is essential that a cannabis entrepreneur understand all of their alternatives for protecting their assets. Cannabis insurance is an obvious necessity but also understanding Tax Code 280E completely is very important.
Tax Code 280E keeps a marijuana company from writing off normal business expenses making it very challenging to turn a profit. The Schedule I status of marijuana makes it a controlled substance that falls under IRS Tax Code 280E, but here are some ideas on how a cannabis company can try and maximize their profits.
Have you ever wanted to give or receive a large gift (birthday, graduation, wedding) in advance of the event? That is what engineering-based cost segregation can do for the entity that owns the commercial real estate and leases it to the cannabis operation. It is essentially a benefit that comes sooner than it otherwise would, hence the phrase accelerated depreciation.
Four IRS-approved methods of preparing a cost segregation study exist. Typically, the engineering firm assessing the building will select the method it will use to do the evaluation. Each method can generate different results toward achieving greater immediate tax savings by creating a positive time-value-of-money (compounding) benefit for the property owner. “Engineering Actual” is the gold standard of cost segregation studies, as it line-items each component as a reference point for defense of the depreciation calculation. It often yields the largest benefit in the cost segregation process, but can also be the most expensive engineering study.
Owners of commercial real estate leased to cannabis operations can elect to charge rent at the higher end of the local market range in order to capture more profit and available tax savings in the real estate ownership entity, instead of retaining additional profit in the more highly taxed cannabis operation. To achieve a financial benefit that is larger than the costs of an engineering study, most businesses will use engineering-based cost segregation for commercial real estate that has an acquisition cost in excess of $500,000, or for existing real estate renovated at a cost in excess of $250,000, which is a low barrier to entry.
Attaining D&O insurance for your marijuana business, cannabis theft coverage, marijuana product liability insurance and more may be the most efficient way to protect your company from liabilities. Reach out to either Eric Rahn or David Rahn at S2S Insurance Specialists.