As tax practitioners with clients in the cannabis business, I think that we get so caught up in Code Section 280E that we forget about the doctors.
I recently spoke at a cannabis event and here is what I heard from doctors: They are nervous about adding cannabis to their practice. Most are pain doctors, and if you know anything about the scrutiny pain doctors are under, then you can understand their concerns. But it’s not just the addition of cannabis that is worrying them; it is the increased revenue they would be making.
For 23 years, I have specialized in high-net-worth clients, and a lot of them are doctors. One question that is being raised is: Should they split off their cannabis practice from their other practice? And the answer is a resounding YES! Anytime that you are exploring a new field, you want to split it off from the company that is already making money.
Not only that, but my methodology in tax planning for doctors, or anyone else for that matter, is to put more money in their pockets tax-free. How is that done? Very simply.
Most companies are set up as S corporations, and that is true with doctors. Being a C corporation as a doctor means the practice will be charged a 35 percent tax. However, if a doctor splits off some functions of his or her practice, like billing, human resources, or something similar, he or she can form a C corporation and pay tax at 15 percent instead of 39.6 percent. Let me explain how this works.
Let’s say that you are a pain management doctor and you are taxed as an S corporation. If you are looking to add cannabis to your practice, you would form another S corporation for cannabis, and then a C corporation to manage the two practices. That C corporation is paid a fee from both practices.
In that C corporation, you pay yourself a salary, and you can also put $250,000 into a retirement plan, plus an additional $53,000 into a 401(k), tax-free. That tax-free $303,000 is nothing to sneeze at. And most importantly, that money is going to you. You have effectively taken $303,000 off the table and saved $119,988 in taxes.
Now, I know what you are thinking: Doesn’t a C corporation have to pay tax twice? The answer is, not if it is structured right. You would pay tax at 15 percent on income, and if you took out anything in dividends, you wouldn’t pay tax at 39.6 percent like you do with your existing S corporation. Instead, you would pay a 15 percent tax.
The next benefit of the C corporation involves tax-free fringe benefits that are prohibited in an S corporation, like a company car, medical reimbursement plans, or college plans, where you can pay $5,150 each year tax-free for you or your employees to go to school. If you have kids, you would put them on the payroll and pay them $5,000 a year. At $5,000, they don’t have to file a tax return and you can use that money for college savings.
The point is that cannabis doctors sometimes get lost in the shuffle because tax planners are so focused on Section 280E. For any doctor out there looking to add cannabis to his or her practice, I would say do it, separate it, and form an overlapping company like a C corporation to oversee it. Then, rake in the tax savings.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.