Charleston, West Virginia issued grower permits for 10 medical marijuana growers out of 39 applicants. Each permit requires action within 6 months or risk of losing. CANBIZ CFO (sister company of Bulldog Consulting, LLC) is currently working with the winner of one of these permits. It is crucial to hire an accounting firm that is familiar with 280e startups right from the start. Pontiac Michigan had only a limited number of permits to issue with a huge number of applicants. It is a common theme. Call us if you have questions regarding your 280e start up accounting needs.
“House lawmakers today began preparing for a September floor vote on legislation – The Marijuana Opportunity, Reinvestment, and Expungement Act a/k/a The MORE Act — to remove marijuana from the federal Controlled Substances Act. The forthcoming vote would mark the first time since the passage of the Controlled Substances Act of 1970, which placed cannabis in the same category as heroin as a Schedule I controlled substance that a Congressional chamber has voted to remove marijuana from its prohibitive classification.
Passage of The MORE Act is essential in order to truly right the wrongs of federal marijuana criminalization and to once and for all allow the majority of states that have legalized cannabis for either medical or adult-use to embrace these policies free from the threat of undue federal prosecution or interference (norml.org)”
It can be difficult to determine which expenses meet the standard for qualified business income for rental properties. The Internal Revenue Service recently issued final guidance on a limited safe harbor. This article will help you understand these complex regulations.
When the Tax Cuts and Jobs Act of 2017 added the qualified business income (QBI) deduction (also called the Section 199A deduction), it didn’t clarify when a rental activity rises to the level of a qualified trade or business. On September 24, 2019, the Internal Revenue Service (IRS) finalized a limited safe harbor for taxpayers who are direct and indirect owners in rental real estate enterprises (Rev. Proc. 2019-38).
Subject to certain limitations, taxpayers who qualify for the safe harbor are eligible for the 20% QBI deduction. If your enterprise is profitable, taking this deduction may be a good tax strategy – at least through 2025 when it is set to expire if Congress does not extend it.
The enterprise can include multiple properties in the same general category, either commercial or residential. To be eligible under the safe harbor rules, the rental real estate enterprise must meet the following requirements:
- Perform 250 or more hours of rental services each year. Enterprises that have been in existence for more than four years, must meet this requirement in three of the last five years. Owners, employees, agents or independent contractors can perform these hours.
- Maintain separate books and records for each rental real estate enterprise. These records should document the hours and dates of all services performed, provide a description of all services performed and include a list of who performed the services. (Beginning in 2020, these records will have to be maintained contemporaneously.)
- Submit a signed statement stating that all of the tests have been satisfied for each year this deduction is claimed.
Which services can be included?
For purposes of the safe harbor rule, rental services include the following: daily operations, maintenance, repairs, rent collection, payment of expenses, provision of services to tenants and efforts to rent the property (such as advertising). They do not, however, include financial or investment management services, arranging financing, procuring property, reviewing financial statements or operating reports or time spent traveling to and from the rental property.
The following types of rental properties are specifically excluded from claiming the QBI deduction:
- Property used as residence for any part of the year, such as a vacation home.
- Property subject to a triple net lease.
- Property rented to a business with common ownership.
- Property where a part is treated as a specified service business excluded from claiming the QBI deduction.
How do losses affect the reduction?
Remember that if your rental property generates losses, the QBI deduction may not be the best tax strategy for your enterprise to pursue. Those losses would reduce the 20% deduction. For some rental real estate enterprises with losses, claiming the QBI deduction can cost thousands. It may make more sense to simply deduct your losses against your ordinary income. As with any tax planning strategy, you need to evaluate the pros and cons in your specific situation.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019. The Act will likely impact large numbers of working Americans as well those already retired. In general, the Act is intended to increase access to tax-advantaged retirement plans and to help prevent older Americans from outliving their assets.
Here are some of the changes that could affect your planning.
Delayed Deadline for Taking Required Minimum Distributions
Tax law has generally required individual retirement account (IRA) owners and retirement plan participants to begin taking required minimum distributions (RMDs) from their accounts once they reach age 70½. The new law pushes back the age at which these distributions must begin to age 72 for IRA owners and plan participants born on or after July 1, 1949. This change allows individuals to take advantage of their retirement account’s tax-deferred nature for a longer period.
No Age Limit for Making Traditional IRA Contributions
Beginning with the 2020 tax year, the new law eliminates the 70½ age limit for making annual contributions to traditional IRAs. This is a plus for those people who continue to work past age 70½ and want to keep saving for retirement on a tax-deferred basis.
Penalty-Free Birth and Adoption Distributions
The new law also expands the exceptions to the 10% penalty for early withdrawals from IRAs and other tax-deferred retirement plans by adding an exception for “qualified birth or adoption distributions” up to $5,000. The new law defines a “qualified” birth or adoption distribution as a withdrawal from an IRA or other eligible retirement plan made during the one-year period beginning on the date the IRA owner’s or the plan participant’s child is born or the adoptee’s adoption is finalized. If desired, parents may replenish their retirement savings by repaying the amount distributed.
Restrictions on Stretch IRAs
The new law places severe restrictions on the use of “stretch” IRAs. A stretch IRA generally permitted beneficiaries to take their RMDs from an inherited IRA over their life expectancy. Thus, beneficiaries were able to stretch payments from the inherited IRA over many years and potentially pass on the inherited IRA to their own beneficiaries. The SECURE Act changes the RMD rules for beneficiaries of IRA owners (and plan participants) who pass away in 2020 or later. Under the SECURE Act, the use of stretch IRAs is restricted to a limited group of IRA beneficiaries. The specific details on who is eligible to use stretch IRAs is complex, and IRA owners who base their estate plans on the use of a stretch IRA should consult with a financial professional to see how they might be impacted.
Small Business Retirement Plans
Good news if you own a small business — the SECURE Act provides incentives to make it easier for you to establish a retirement plan. Starting in 2020, eligible employers that establish a 401(k) or SIMPLE IRA plan with automatic enrollment may qualify for a new tax credit of $500 per year for up to three years. In addition, the existing credit for small employer plan startup costs has increased to as much as $5,000 per year for three years. Previously, the annual credit maximum was $500. Employers also have more time to establish a qualified retirement plan. Previously, a qualified plan, such as a profit sharing plan, had to be adopted by the last day of the employer’s tax year to be effective for that year. The SECURE Act allows a qualified plan to be adopted as late as the employer’s tax filing deadline (plus extensions).
Your financial and tax professionals can provide more details about these and other important SECURE Act changes and how they may affect your retirement planning.
Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.
While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.
Is It Income?
In an “information letter” released in 2016,1 the IRS stated that crowdfunding revenues will generally be treated as income unless they are:
- Loans that must be repaid
- Capital contributed to an entity in exchange for an equity interest in the entity
- Gifts made out of detached generosity without any “quid pro quo”
The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”
Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.
If It’s Income
“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.
Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.
Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or nonqualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2020).
These are just some of the potential tax issues that may arise. Consult your tax advisor regarding your specific situation.
The growth of the marijuana industry is warranting increased tax compliance efforts and additional guidance.
Just recently Forbes was reporting on a large cannabis company that went under because of poor record keeping and unscrupulous behavior by those higher up in the company. Keep in mind that the IRS is aware that over 70% of cannabis business are under reporting their taxes.
A study conducted by the Treasury Inspector General for Tax Administration in March 2020 reports such findings. The random samples found 140 out of 237 cannabis business had under reported. The amount totaled to $48.5 million in unassessed taxes for 2016. Did someone say INFRASTRUCTURE?
The IRS has not been shy on increasing audits to marijuana businesses in 2021. An issue that we at Bulldog Consulting find a lot when doing 280e assessments is all costs being thrown into the COGS and real estate percentage amounts not being correctly done.
Looking for an accountant, why not a remote CFO at the fraction of the cost of an on-site bookkeeper, accountant, CFO? If you feel your books are not up to snuff, give us a call at 833-4-CANBIZ or 833-422-6249. Get ahead of the game!