Some objects are easy to count and measure: money, rare artifacts, glittering diamonds and generous hunks of gold. Things get much trickier when you can’t simply weigh the valuable item on a scale or assign it a quantitative value. Such items are called intangible assets. In this article, we will explore in more detail what intangible assets are and how they are measured.
What Qualifies As An Intangible Asset?
What makes an intangible set valuable is that it provides some tangible economic value. This value might not be readily apparent just by reviewing a business’s records.
To give you an idea of what an intangible asset is, here are some common examples:
Why Measure Intangible Assets?
Measuring intangible assets may seem like a futile endeavor, especially since they have no concrete numbers backing them up. But think of it this way: if you and your spouse run a business but one day decide you want to go your separate ways, you want to make sure that you can still hold on to what you have worked hard to create. That doesn’t just apply to the products that have already been crafted and placed on the shelf but also to future products that have not yet seen completion. A simple piece of paper like a patent can ensure that you can keep creating what you put work into making a reality.
How Are Intangible Assets Measured?
Intangible assets vary in function. As such, it doesn’t make sense to value a patent the same way you would a leasing agreement. What does help is to consider the following criteria when assessing the value of intangible assets:
Market Demand. Ask yourself honestly: does the asset satisfy a present consumer need? If so, what is that need and what is a realistic price for the average consumer?
Income Potential. Of course, you’ll also want to consider how much money the asset can generate long-term. This can be hard to predict, which is why there are many different methods available for calculating intangible asset value.
Cost of Production. Sometimes, an idea may look incredibly lucrative on the surface. In many ways, it may be. Unfortunately, you may find out that the cost of producing a product outweighs what you earn from it in the end. Such factors should be taken into account when estimating the value of an intangible asset.
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Because cannabis is a federally labeled class one drug, cannabis retailers must pay several taxes to be able to sell their products. For customers, this can create sticker shock as the price at the register can be 20% to 40% higher than the cost on the sticker.
In California, there are several types of taxes compounded onto a transaction, so it’s imperative to properly calculate the tax of the purchase. One of the taxes to be aware of is the excise tax.
Today, we’ll review what the excise tax is and how to calculate it.
California Cannabis Excise Tax
The excise tax is for cannabis products being sold to customers. Distributors charge cannabis retailers this tax. The excise tax is 15% for retail purchases of cannabis goods. The excise tax is calculated based on the average market price of cannabis in retail. The distribution part of a cannabis business is required to report and pay the cannabis excise tax to the CDTFA on the cannabis tax return.
How to Calculate Excise Tax
Any authorized cannabis distributors must collect the 15% cannabis excise tax from retailers when selling cannabis products to the retailers.
Arm’s Length Transaction
For an arm’s length transaction, or one between two informed and willing parties, the payment the retailer collects must be equal to the fair market value of cannabis/cannabis products in the open market. Essentially, this means the wholesale price plus a markup.
The wholesale price is the cost of cannabis plus transportation, before any trade allowances. Cannabis purchased at $125 and shipped for $20 will have a wholesale cost of $145. According to the California Department of Tax and Fee Administration, the mark-up rate is set at 80%.
Nonarm’s Length Transaction
If the cannabis retailer is also the distributor, this is known as a “nonarm’s length transaction.” for nonarm’s length transactions, the average market price of cannabis is calculated with gross receipts. The 15% cannabis excise tax is applied to the gross receipts.
The “gross receipts” include all charges for the sale of cannabis including:
Selling price of cannabis product
For example, a delivery charge is included in the gross receipts used to calculate the cannabis excise tax. If you add an amount to cover the cannabis business tax to your customer’s invoice/receipts, then that amount is also included in the gross receipts.
Staying on top of your excise tax is essential for smooth operations. All cannabis businesses should ensure they comply with the calculations above.
Ask any cannabis entrepreneur what the bane of their business is, and they will likely say it’s the IRC 280e Tax Code. Regardless of its irksome nature, cannabis sellers must abide by it or risk losing everything – not to mention possible jail time for money laundering. No one wants that, so here are a few facts to get you started in calculating tax costs.
What is IRC 280e?
First, a brief overview of what 280e is. It all started in 1981 with Jeffrey Edmonson v. Commissioner. This was a court case in which a cocaine, amphetamine, and cannabis trafficker (Edmonson) fought to deduct “ordinary business expenses” from his taxable income. The court ruled in his favor – he was allowed to deduct the majority of his expenses, including the cost of goods sold (packaging as well as phone, home, and vehicular expenses). Less than a year later, though, the decision was overturned, and business owners selling controlled substances were barred from the right to deduct expenses from their illegal businesses. These businesses were originally made illegal under the Controlled Substances Act (CSA), signed by Richard Nixon, and classified as Schedule I and Schedule II controlled substances. Ronald Reagan later expanded this “War on Drugs” by enacting harsher penalties for drug-related crimes, culminating in the passing of IRC 280e. Section 280e forbids businesses from deducting expenses from their gross income when it involves “trafficking Schedule I and II controlled substances”. This also prevents businesses from taking credits. Federally, marijuana is still considered an illegal (Schedule I) controlled substance. What that means for cannabis sellers is that, despite its medical and recreational legality across the states, they are forced to pay taxes on all of their business income. In addition, they’re prohibited from writing off most business expenses to minimize their taxable income.
How Much Do I Owe?
When 280e was passed by Congress, they added an exclusion to prevent future changes to the law. This exclusion allows cannabis entrepreneurs to deduct the cost of goods sold (COGS). This means that even federally illegal products can be claimed for a deduction. The cost of goods sold refers mainly to inventory costs. This means the cost of shipping to the retail location, the cost of the product, and any directly related expenses. However, this doesn’t offer the cannabis seller much in terms of a tax break. The IRS ignores any tax changes made after section 280e, which allow more indirect costs to be applied. Essentially, anything expense related to distribution can’t be included under COGS. That includes rent, outbound shipping and some inbound shipping, health insurance premiums, maintenance and repairs, marketing/advertising, employee expenditures, and utilities. In practical terms, business owners can deduct little more than the seeds, soil, water and nutrients essential to plant and cultivate the cannabis.
Because cannabis business owners must pay taxes on gross rather than net income, they end up paying tax rates that are 70% or higher. That’s quite a bit more than the rates paid by non-cannabis business owners, whose rates tend to be closer to 30%. Paints a pretty good picture of how the cannabis industry is affected overall in terms of tax rates.
How Can I Maximize Deductions?
For new business owners, it’s advisable to set up as a C-corporation. This allows the business owner to only pay taxes based on their salaries and dividends. Consider looking into a shared service agreement as well – which splits your business into two entities. The first structure would handle cannabis production and distribution, whereas the other would deal with legal responsibilities. That includes counseling, care, selling related (but not cannabis-infused) merchandise, and management of the retail space. This means only the first structure would be responsible for compliance with the 280e tax code and its definition of COGS. The second entity can then deduct ordinary expenses such as rent and utilities, payroll, sales, administration, marketing/promotion, and some distribution. However, be sure to consult with experts who specialize in cannabis compliance. Doing this before you get started with a shared services agreement will help you avoid any violations.
It’s important to keep impeccable records. The danger of neglecting this area is not just in loss of business, but potential jail time. To stay in the clear, document everything. Audits can come at any time – more often for cannabis businesses since it’s a federally illegal substance. Sales, wages, and vendor payment should be accounted for, and everything should be well organized. Professional advice is paramount. An expert CPA can provide guidance regarding how to record detailed COGS deductions and what will and won’t qualify. Electronic records for managing documentation for workforce, spend, inventory, etc are crucial. Report all cash transactions, including deposits, payments, and single cash sales over $10,000.
For tax purposes, track employees’ tasks and time spent on each. It’s essential to do this to provide accurate reports on employees’ salaries as well. A part-time cultivator and part-time budtender fall under different tax codes. For employees who perform multiple tasks, it’s important to track the time they spend on each task. This helps you determine how many hours are deductible under the 280e tax code. To make this simpler, you can designate specific responsibilities for each employee, or consider investing in employee time and attendance software for cannabis to keep track of everything.
There’s a lot that goes into being a cannabis entrepreneur during tax time, but with expert guidance, cannabis business owners can relax and enjoy the work. That’s one less thing to worry about – happy growing!
Fairly dividing assets in a divorce is a tricky and sensitive topic for both parties, but it is an essential part of the divorce. When kids are involved, it’s only more important to ensure assets are fairly divided.
While it can already be a challenge, splitting community property only becomes more complicated when the community and separate assets are mixed. Tracing, or tracking back the origin and development of assets, is essential for uncovering assets in a divorce and ensuring the property is divided equally.
Community vs Separate Property
Property must be characterized in a divorce. Community property includes the accumulations, earnings, and assets of either spouse from the date of marriage to the date of separation. Separate property is the property that either party had prior to marriage or after separation. In a divorce, community property is to be equally divided among each party, and the two parties typically take their separate property.
However, this is not always straightforward. Many parties mix community and separate assets during the marriage.
What is Tracing?
As the name suggests, tracing is a method used to uncover assets. It involves searching back through various transactions to identify the development of assets and liabilities. This method is used to determine when an asset was acquired and how it may have combined with community assets during a marriage.
Tracing can be used to determine separate properties, and it can also be used to uncover undisclosed assets.
Uncovering international assets is a common challenge that people face, as they can e hard to find when your spouse does not disclose them. However, experienced professionals can often uncover international assets with advanced tracing. A professional can request relevant documents for business, bank account, and offshore assets.
Tracing may also be used if one party believes that their spouse is not forthcoming with their assets. In this case, you should get a court order for asset disclosure. The court order will require the spouse to disclose all relevant financial documents and information. Should the spouse fail to disclose assets, they can be charged with contempt of court.
Uncovering Assets is Complicated
Property division during divorce can be tough, especially when uncovered assets are in question. Seeking the expertise of a divorce attorney can offer you professional guidance to ensure you get the assets you are entitled to. Contact Miod today for more information and to schedule an appointment.
Most parents want to go above and beyond to care for their children. This is true whether Mom and Dad stay together or go their separate ways. That said, determining child support can feel like a daunting process, at least on the surface.
Each state has its own regulations for calculating child support. In California, determining child support requires a complex calculation. This calculation is used to determine the financial support of a minor child, usually due to divorce or separation.
We’ll explain the basics of the California child support guidelines and how child support is calculated.
California Child Support Guidelines
The guidelines for child support in California are designed to offer one uniform calculation for determining how much of a parent’s income should go toward meeting a child’s basic needs. These guidelines are found under California Family Code, §§ 4050 to 4076 and take the following ideas into account:
The parents’ job is to care for their children, providing adequate food, shelter, and other resources to promote a reasonable quality of life. What a parent provides will depend on the parent’s financial situation.
Exceptions to the guideline are only used in special cases.
Child support orders should be made to sufficiently provide for a child while also taking into account California’s high cost of living.
Both parents are responsible for supporting their children.
Components Used to Calculate Child Support
Child support takes into account many different factors, including:
The gross income of each parent. A judge will look most closely at the net monthly disposable income of each parent.
The percentage of time each parent spends with each child.
Tax deductions the parents can claim.
Child care costs either parent faces.
Mandatory payroll deductions.
The formula for calculating child support in California is:
CS= K (HN-H%)(TN)
CS= child support amount. This is the answer the calculation will give when you enter your information.
K= The total allocation for child support of both parents’ income.
HN= High net. This is the net monthly disposable income of the parent who earns more money.
H%= The percentage of time the higher-earning parent has primary physical responsibility of the child.
TN= Combined total net monthly disposable income of both parents.
Exceptions to the Guideline Amount
In most cases, the court will use the formula above to determine child support amounts in California. However, exceptions do exist. Family Code Section 4057(b) has the full list of factors that will allow deviations from the guideline.
Consider this example. One parent may have a very high income. If the amount determined by the formula exceeds the need of the children, the judge may choose to award child support that’s lower than the formula.
The calculation from the guideline above is used in California to determine child support. Ultimately, the formula considers the parents’ incomes, tax deductions for each parent, time spent with the child, and more to determine a fair child support amount.
Need more guidance with matters concerning child support?