How to Deduct Marijuana Equipment from Your Taxable Income

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The marijuana business is rapidly evolving right before our very eyes. As states gradually begin to legalize marijuana use, whether for recreational or medical purposes, marijuana businesses are popping up everywhere to capitalize on the momentum of the legal changes.

As states across the country continue to legalize the medical or recreational use (and production) of marijuana, the legal and tax structures are always going to be on the verge of change. This is the way it always is with new markets and opportunities. Business owners and investors that are able to stay with or ahead of the curve are the ones that will benefit the most.

What many businesses don’t realize is that there is a way for them to take advantage of another tax opportunity that allows them to deduct marijuana equipment off of income that is otherwise taxable. In other words, this new opportunity will allow you to be able to lower your bottom line or increase profits overall.

Not very many businesses are aware of this opportunity, so why not see if you qualify?

How Tax Code 280E Impacts Cannabis Businesses

Under normal circumstances, Tax Code 280E will prevent cannabis growers, processors, and dispensaries from taking advantage of tax deductions that other businesses are familiar with. Such as tax code section 179.  Although many states have legalized the production and distribution of marijuana under certain circumstances, marijuana is still considered a “federally illegal product.”

Because the federal government doesn’t see marijuana as legal, they won’t recognize deductions that are affiliated with the production and distribution of marijuana. In other words, anyone involved in the marijuana business will end up spending more money to operate their business than other businesses might on average.

This happens because any company with a cannabis license can’t depreciate any of the equipment they buy. While any other company would normally be able to depreciate the equipment they buy over its useful life OR be able to accelerate the depreciation in the first year utilizing Section 179 tax code. 

What’s Happening in the Market Today?

Due to the rising opportunities for marijuana businesses, there are many investors who are trying to get into the market to turn a profit for themselves while helping the businesses they fund. Just like any industry, investors can help to make or break a business that’s starting out or attempting to grow their business exponentially.

With any market rush, like in the marijuana industry happening today, there is a LOT of money moving around very quickly. What some investors and businesses are realizing is that they made a mistake in how they purchased their marijuana grow equipment. While it may not have seemed like a big deal at the time, the method of purchase prior today can mean that they are missing out on the great opportunity to deduct even more off of their taxable income.

Marijuana business owners that are trying to take advantage of an opportunity to increase deductible amounts on their tax returns are calling equipment leasing companies for a “sale leaseback,” which is where an equipment leasing company purchases the marijuana equipment directly from the marijuana business owner. After the purchase has occurred, the equipment leasing company leases the same equipment right back to the marijuana business owner. 

What business owners expect is that this method will allow their marijuana business to make monthly payments to the lessor, expecting to be able to write off 100% of their payments off of their taxable income as deductible. The conditions stated for this method is that the lease has to be structured as an “open ended buyout,” where there is no predefined buyout before the end of the term.

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Rather than simply buying their equipment in cash or just getting a loan under standard methods, marijuana business owners are choosing to opt in to lease their marijuana equipment, believing that it will allow them to get around Tax Code 280E

What business owners don’t realize is that paying cash for there cannabis equipment can be a mistake in most cases and that there’s a better financing option that allows them to get the best deductible for their cannabis equipment.

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The Hidden Opportunity to Deduct Marijuana Equipment

Even though the federal government sees marijuana as a federally illegal product, there is still an opportunity to deduct marijuana equipment off of your taxable income.

Certain equipment leasing companies are capable of structuring the lease agreement with the customer as a “tax lease with an FMV buyout,” which is also known as an “operating lease.” From the perspective of taxes and accounting, business owners that lease their equipment can write off 100% of their “rental payments” off of their taxable income because it’s viewed as a “rental expense,” and not a “capital expense.”

Business owners can simply take their monthly payment and multiply it by 12 for 12 months out of the year and put that new numeric figure on the “rental expense” line of their taxes, which results in lowered taxable income.

In other words, the ability to do this greatly increases overall business savings by being able to write off certain marijuana equipment as an expense when done correctly. When your business is able to write off more expenses within its operation, you’ll have more profit in the end. By doing this, you’re also directly increasing the value of your marijuana grow equipment, marijuana extraction equipment, and other forms of equipment within your marijuana business because the purchase “costs” you less.

What to Do at the End of the Marijuana Equipment Lease

At the end of the lease, business owners can make a choice based on their personal and business goals:

Renew the Marijuana Equipment Lease

Depending on the goals of your business, it may make sense to continue with your existing equipment and renew the lease for another year (or on another agreed term). For some business owners, it may be more strategic to keep working with the equipment you have if business is going well. The philosophy of “don’t fix what isn’t broken” resonates well with some businesses, because taking time out of your productive business to get different equipment can mean a loss of profits.

If you expect to get different equipment in the future, but don’t want to deal with the process of getting a different lease or researching different equipment at this point in time, then renewing the lease is going to be your best option to stay on track and keep the profit coming in.

Return the Equipment + Get New Equipment

When business is going well, but you’re realizing that the equipment is a bottleneck for the amount of marijuana you can grow, process, or distribute, then it’s time to get new equipment. While returning the equipment and getting new equipment can mean a temporary slowdown of your overall production, it may still be worth it if you’re going to be significantly increasing the quantity or quality of your results.

Buyout with a Cash Offer

If the equipment you’re using is absolutely solid for your business and you are not expecting to replace it anytime soon, then formally buying the marijuana equipment will make a lot of sense for your business. By putting up a cash offer to “end” the lease and acquire the equipment for your business, you’ll get rid of one of your “monthly payments” and can put those funds into other areas of your business.

This option will also make it possible for you to sell your equipment later on down the road if your business grows and you know you’ll need to upgrade in the future.

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