What Is the Difference Between CBD and THC Accounting?
November 27, 2020 (Investorideas.com Newswire) The cannabis industry is booming, and there has never been a better time to start a CBD business. However, there is a major obstacle that new cannabis business owners need to get around: Accounting.
There are different steps and techniques involved in cannabis accounting compared to traditional businesses. The cannabis industry is still fairly new, which makes accounting an even bigger headache.
Understanding the difference between THC and CBD, cannabis, marijuana and hemp is essential when trying to wrap your head around cannabis accounting.
The Difference Between the Two Plants
CBD can be extracted from the hemp or marijuana plant. Hemp is the term used to classify varieties of the cannabis plant that contains less than 0.3% THC, while marijuana refers to parts of the plant that contain more than 0.3% THC.
THC is the primary psychoactive compound found in marijuana and is responsible for giving the "high" sensation. You can consume it by smoking marijuana or extracting the THC and adding it to some form of edible or topical delivery.
Ultimately, hemp and marijuana are varieties of the cannabis plant, and the defining characteristic between the two is based on the amount of THC in the plant.
WayofLeaf has some great resources on hemp, marijuana, CBD, and THC.
Differences from a Legal Perspective
According to the 2018 Farm Bill, CBD derived from hemp is legal, while marijuana and anything that contains more than 0.3% THC is still illegal and subject to federal laws.
The legalization of hemp and hemp-derived CBD has taken the CBD market to new levels. These types of products are no longer subject to the provisions of the Internal Revenue Code 280E, which means that any CBD business engaged in the hemp and hemp-derived CBD market can now take normal deductions just like other businesses.
Generally, a cannabis company can only deduct their cost of goods sold. Hemp-based businesses, on the other hand, can now operate like a regular business, meaning they can deduct their cost of goods sold, along with all of their general, operating, and administrative expenses.
Since THC - which is found in high concentrations in the marijuana plant - is still illegal on a federal level, THC accounting does not have the same advantages as CBD accounting.
The Difference Between CBD (Hemp) and THC (Marijuana) Accounting
The similarities between hemp and marijuana accounting align with the financial record-keeping and accounting of any business. All businesses require standard financial reporting, bookkeeping procedures, and adherence to generally accepted accounting principles. Tax planning and filing tax returns are necessary, and they're generally treated like any business.
However, traditional cannabis accounting requires additional focus on record keeping, tax limitations, and financial compliance. Marijuana (THC) business operations require conformance to 280E. As we've already mentioned, this limits businesses that produce or sell marijuana or THC-based products from deducting business and general expenses for federal income tax purposes.
Furthermore, marijuana businesses also have limits on the costs they can assign to inventory. They are excluded from all federal farming and agriculture grants or tax incentives.
Since hemp and hemp-derived CBD is now federally legal, it needs only to follow traditional agricultural accounting standards and methods. That said, these CBD businesses must keep accurate records to prove that their products contain less than 0.3% THC and are, therefore hemp.
Check out the best CBD edibles here.
The Impact of the Internal Revenue Code 280E
Due to section 280E, the cost of doing business in the THC industry is much more than the CBD market. THC/marijuana entrepreneurs have to pay taxes on their gross profit rather than their net income. Typically, marijuana business owners end up paying tax rates of 70% or higher. That is a lot more than (about triple) the tax rate paid by non-cannabis or CBD/hemp business owners.
For instance, compare a marijuana business and hemp business with gross revenue of $1 million. The cost of goods sold is $650,000, which leaves a gross income of $350,000. The difference lies in the deductible business expenses.
Where the hemp/CBD business owner claims $200,000, the marijuana business owner cannot claim anything. This means the hemp business has a taxable income of $150,000, while the marijuana business is still at $350,000.
With an average tax rate of 30%, the hemp business owner only pays $45,000 in taxable income. But at the same tax rate, the marijuana business owner is subject to pay $105,000. This means that the effective tax rate for the hemp business is 30%, while the effective tax rate for the marijuana business is 70%.
As you can see, section 280E plays a key role when distinguishing between CBD and THC accounting, and it can mean the difference between running a profitable or unprofitable business.
Final Thoughts on CBD and THC Accounting
CBD accounting is generally much easier than THC accounting, provided that CBD businesses follow the regulations set by the US government. Unlike marijuana (THC), hemp (hemp-derived CBD) is federally legal, and therefore hemp businesses tend to operate much like other retail businesses when it comes to accounting and taxes. Marijuana businesses, on the other hand, operate according to stricter rules and regulations and are generally speaking less profitable.
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