As with any business, there are a lot of stress and challenges with taxes in the cannabis industry. The good news is there are also solutions. In this episode, Anthony Frischknecht shares how you can deal with your taxes in your cannabis business. Narrating the times when he had his back against the wall, Tony shares how he went about getting help to alleviate the stress in handling taxes.
Listen to the podcast here:
Tax Challenges In The Cannabis Industry
I appreciate everybody out there reading and I hope I can provide some help and potentially navigate you to save yourself from major problems in the future. One of these major problems is taxes. It’s not a fun one. One of the biggest challenges running a company is dealing with taxes. If you plan and you decide to work on this early rather than last minute like so many do, you can save yourself a lot of headaches as well as a lot of stress. The stress that comes behind taxes can change the way you make business decisions. If you can eliminate that, it helps to provide a little bit of sanity in this crazy cannabis world. I want to start by talking to you about some of the mistakes that I made dealing with taxes and trying to navigate that. The big one that you should think about is what you’re setting your business up as. There’s LLCs, S-Corps, C-Corps and there are so many things that you can start your company in. You can also elect into new ones. You should talk to your tax specialist about this. Don’t just take my word for it but this is some information so you can ask the right questions. There are a lot of CPAs out there. Like attorneys, there’s a lot of them flocking to this industry because they see the boom happening.
You need to be prepared with having some of this information that you can ask these professionals because 95% of them haven’t dealt with an animal like this. We started our companies and we started in LLCs and ended-up electing into S-Corps and C-Corps. You really want to know the difference between each of them because there are some big tax implications that can happen in each entity. As for the C-Corp, one of the mistakes we made was a matter of trying to save from being double-taxed. My business partner that was running the financials at that time came to us with the proposition, do we want to be double-taxed or do we want to try to keep some of our money? In hindsight, the double tax came with a lot less risk. What it did is it came with a risk that you are not responsible for any taxes due if there is an issue personally in a tax audit. I would say three years after I exited my dispensary, there was an audit that was started and we are fighting this. Lo and behold, we found out we’re personally responsible for these. This is a huge blow and we’re not taking it sitting down.
Had I understood the ramifications of S-Corp or C-Corp, I would have definitely voiced my opinion a lot more with my business partners saying, “If something happens, the sky falls and the government comes after us, we’re going to hope for all these back taxes that if we had been in an S-Corp, we wouldn’t have had that issue.” These are lessons we learned as business people in structuring when you’re starting in and the pace is moving so fast like so many of you are. It’s a matter of getting your product made, giving it to your consumer, getting all your bills covered and trying to grow your company. It’s about the last thing that any business owner would like to deal with. I know because I was there. We didn’t want to deal with that part because it is confusing. The tax laws are so confusing to take time, sit down and take an entire day to work on it. You barely scratch the surface. You try to hire competent advisers to help you with this and understand what’s going on.Probably one of the biggest challenges in running a company is dealing with taxes. Click To Tweet
There were a couple of big mistakes. One was trusting that your business partner knows everything about taxes. It was a mistake on my part but the other was getting the right CPAs in place and the right counsel. It was challenging back then because we didn’t have anybody that had gone through any of this. Nowadays, you’re a lot more fortunate because there are many tax advisors and tax attorneys that have been through audits. It makes it much easier to find somebody that understands stuff, in particular a 280E. If you guys are not aware of 280E and you’re dealing in this business or you’ve started this business and you don’t understand it, I suggest that you go and search it. I have a bonus page on my website. It’s a quick sign up and you can go in there. It’ll give you a breakdown of what 280E is. The website is tonyfrischknecht.com. You can go in there and put your email and your name and it’ll give you a quick rundown.
You can also dig it up or find it online as well. You can easily search for 280E. I tried to make it simple on post-to-form that will give you an understanding of how it works. If you’re not aware of it and you’re not aware of how it works, it doesn’t allow for normal business deductions that say a convenience store has two employees. They might have one employee run in the register and one filling up the cold cases, the candy bar and gum racks. To simplify it for you, I’m going to say the money that you pay to the employees of $10 an hour for 40 hours a week, $400 a week in payment to that one employee is non-deductible because you are dealing with the schedule of one narcotic if you are in a dispensary. This is different for your extraction companies, your grow facilities but I encourage you to educate yourself and make sure you understand how 280E affects your specific business.
If you run across anyone that says they’re a specialist in the cannabis industry and they know nothing of 280E, run. Those people do not know what they’re talking about and they’re going to get you in some serious trouble. For those people out there that are in some serious trouble, on my website too in that same bonus section, I have a recommendation to someone very well-educated in cannabis audits. Her name is Rachel Gillette. She’s simply incredible. You can get her information there or you can google her, either one. She has helped me out and so many others in our industry with the audit as well as discussions with city and state, not just federal audits. She has been working in the cannabis industry for several years, so she knows what she’s talking about.
These are the type of professionals that I’ve been able to tap into over the last several years. It changes the way your stress levels are at. When I talk about these professionals taking the weight off of your shoulders and you can turn to them and say, “Please help me,” there’s nothing better than that when you feel like your back’s against the law especially dealing with the government. To take these stresses off of your plate is what I’m trying to do. Get specialized help even when you’re in the planning stage before because what I have been told several times is it’s not if, it’s when. Audits are coming constantly. You’re not hearing about them that much in the social media enough. They’ve started in Colorado within the 2012 time period and they’ve been working themself up. You’re going to start hearing about them especially because of California. I want to prepare you to have a strategy in place. Taking and putting a tax strategy together with your professional is key to your success. Utilizing this before it happens and being proactive instead of reactive is going to save you so much time and so many headaches that I’ve been through.Taking and putting a tax strategy together with your professional is key to your success. Click To Tweet
This is going to change the way you do your business. It will give you a leg up on a lot of your competition. I know Tony G. is like, “I’m doing everything I can to make my business work.” I get it, but spend the time to find somebody to help you with this. If you don’t have time to do it, you’re going to have to hire somebody. You’re hiring them as an insurance policy because you’re going to tap into that insurance policy at some point. Without having those people in place, you can easily get blindsided. I’ve been blindsided several times and had I known a lot of this information prior, I could have set up steps in place to make it a lot simpler. I want to make my life simpler and I want to work on my business. I’m an entrepreneur like so many of you are. The last thing I want to do is deal with all the little minor things that come along. What happens is with taxes, it seems like there’s a lot of minor things they build and it’s like a bubble.
It’s like, “We didn’t get this payment sent out to the state. We’ll make sure we do that.” There are so many fines, penalties and everything that stack up against you. That bubble is expanding and blowing up bigger. Finally, you hit a point where it’s about to pop and then you’re like, “I got to do something about my taxes. I’m freaking out. What am I going to do?” When you’re in that position and you’ve got massive overhead that you’re having to cover every week whether it be employees, rent, you owe vendors, it is overwhelming. It can literally paralyze you from making decisions.
Hopefully, you’ve got a good team behind you that can help you through those bad parts or those challenging parts of the business. These are things that can affect you even if you aren’t successful. There’s some big stuff that most of you don’t know but if you don’t make it in this industry and you end up failing, you’re still going to owe these taxes. That’s the worst part. “My business failed and I still owe $150,000 to the government.” You can’t go bankrupt on your taxes. There’s the biggest part that I’m going to share with you in this episode. This is what I like to say my golden nugget. Because it’s not federally illegal, you will not be able to declare bankruptcy if you fail in the cannabis industry.
What that means to you and me is, “I’m going to be paying for this for the rest of my life.” Yes, that’s exactly it. Some of you will say, “They’ll change. It’s going to be legalized soon enough.” None of us has a crystal ball. We don’t know when it’s going to change. If that doesn’t change or when it changes and you’re in this situation and you owe the taxes, more than likely it doesn’t retroactively put you in this bucket of, “They’ve changed that law now. I can get involved in this.” That’s not how it works. Not unless they specifically stated. Getting something like that to be stated is a huge mountain to climb. By then anyway, you’re not going to have any money to help fight or to try to change that law with lobbyists and spending money there so you’re still going to owe it.
I don’t know about you, I don’t think that anybody understands how significant a challenge that is and how big of a risk that is getting into this industry because it’s not talked about. I don’t want to scare you. Still, there’s a huge opportunity in this but these are some pitfalls that you need to avoid to not only be successful but not go in debt to where you can’t get yourself out of because that will haunt you forever. Anybody have student loans out there? 50% of Americans do. You can’t go bankrupt out of your student debt loans. Imagine another student debt loan that you’re paying off for the next 40 years or 50 years. Do you need that $500 to $1,000 payment on top of your living expenses just because you started a business? No. That’s not what America was founded on. We were founded on an opportunity.
I urge you to dig into this subject deeper. Find the right tax specialist to help you build your strategies, to keep you in the black instead of keeping you in the red. That is something that everybody should be looking into. I want to thank you guys for joining in and I hope I didn’t scare too many of you out there. I truly want to help you guys succeed. This is a big piece of the puzzle that you need to be aware of. If you are interested in learning a little bit more about taxes, check out my website, tonyfrischknecht.com. I also talk about it in my book. It’s one of my chapters. The book’s name is From Black Market to The Man. Let me know what you want to talk about. I’m going to keep bringing up some more of this information as we go along. I know it’ll help you because you started utilizing it. I look forward to the next time. Bye for now.
About Tony Frischknecht
Born and raised in Colorado, Anthony always enjoyed the challenge of starting and building a business. That is why it became a natural progression at the age of 25, he became an entrepreneur, with two small construction companies. In 2005, he got his start in the medical marijuana industry in Fort Collins, Colorado, building a small MJ caregiving business, Highway to Healing.
By the time he was 35, he had two dispensaries with sales of $6.5MM annual revenue, including two indoor grow facilities, with a combined 20,000 square feet of production in Denver, Colorado. All four locations consisted of 19 city and state licenses. Anthony then joined a group of five industry leaders and started a successful cannabis brand O.penvape in late 2012. The maker of vaping products and edibles posted a top-line sales of $100 million in 2016 and sells a product every nine seconds. Its busy lab creates over 1 million grams of concentrated cannabis oil a year and it buys 10 tons of marijuana a year. Organa Brands is the only cannabis company with products on the market in 10 states, including at 1,200 dispensaries. Subsequently, Anthony has moved on to other ancillary businesses involving small scale extraction and commercial grow technologies.
If you ask Anthony about his favorite part of this industry? His response, “watching how fast it is evolving. It’s becoming a real industry and getting accepted by many, many of those who used to be skeptics. “ Due to this, we are seeing great leaps in innovation and technology. And this is exactly why Anthony says he is in admiration of this industry.
Anthony has been successful in the Cannabis industry for over 14 years and has been featured on the cover of Newsweek: October 29, 2012; The New Pot Barons and Cannabis Business Times: September/October 2016; Ten Questions