The Cannabis world is an ever increasing “hot market”. Set to be a $70 billion industry by 2021 (that’s just the regulated portion), we’re going to inevitably continue to see more legislation and more growth as this industry continues to heat up. Those numbers by the way don’t include the CBD and Hemp market which would double that total.
The bottom line is, we will continue to see significant growth of legitimate legal cannabis businesses all of whom are struggling with current tax, accounting and Federal banking regulations. The Senate is set to hear a safe banking bill next week that canna companies are hoping will pave the way for access to banking relationships, but that doesn’t mean that they won’t still be subject to significant regulations. Currently, cannabis companies who are lucky enough to have a deposit relationship are subject to strict reporting requirements. Essentially, you can envision the bank requiring a full internal audit of your accounting records on a monthly basis in order to maintain your deposit accounts.
“Even a good canna owner will be able to give you a number but won’t be able to produce documentation as to how it was calculated. Lack of documentation upon an IRS audit can be the defining factor between a business surviving or being shut down.”
The banking issues alone are enough to set companies for a lot of headaches, not to mention potential cash losses. Then we get into the even more trying tax laws. IRC 280e is the tax code that addresses the deductibility of operating expenses related to “trafficking”. Because cannabis is still considered an illegal Federally controlled substance, the IRS tax code does not allow for even legitimate cannabis businesses to deduct operating expenses on their tax returns. Owners are relegated to only being able to deduct their cost of goods sold. That seems easy enough until you ask an owner how much it costs them to grow a pound of marijuana. Even a good canna owner will be able to give you a number but won’t be able to produce documentation as to how it was calculated. Lack of documentation upon an IRS audit can be the defining factor between a business surviving or being shut down.
To give you an example of the intricacies involved in maximizing the cost of goods sold deduction and proper documentation, let’s say a grow facilitiy has two employees. One employee is your cultivation staff, their responsibilities include tending to the plants, prepping and packing them for sale. Your second employee is your sales force, they’re responsbile for making sure your product ends up in the hands of your patient/client. Under 280e you could legally deduct the salary and benefits expenses related to employee number one tending to your crop. Employee number two however is considered to be participating in “trafficking” and therefore any expenses related to their employment are not deductible to the business. Seems simple enough until the IRS comes out to tour your facility and both employees are going back and forth between your dispensing room and your grow facility and interacting with clients, you may lose the ability to deduct both employee’s costs.
So why do you need a seasoned cannabis CPA on your side. It’s not as simple as just throwing together some documentation. You require a professional with years of tax experience who knows the level of documentation that is required for a successful audit. Because that level of documentation is even more intense and non-traditional in this industry, you require someone who knows exactly where to look and what to focus on to assist you in protecting your profits. The wrong professional, while they may be an expert when it comes to serving other businesses, they can cost you thousands, if not more, by inadvertently giving you advice that doesn’t fit in the cannbis world.
“A solid CPA or lawyer has a system already in place for servicing cannabis business owners.”
Look for a professional that has specific training in the industry and is preferably focusing their attention on canna only clients. A solid CPA or lawyer has a system already in place for servicing cannabis business owners. They know what documentation is required, what entity structures work and what don’t. They’ve read tax law, they have a solid network of canna friendly vendors they know you can work with and mostly they’re not cheap! Professionals serving this industry are relegated to just as much documentation, I dotting and T crossing as the clients they’re serving. If you’re getting someone for what seems like way too low of a fee, that’s a good indication that they don’t have professional knowledge of what it takes to actually help and protect you in this industry.
If you’re a cannabis CEO looking for more assistance with finding the right accounting professional and business advisor to assist you, please schedule a call with us at https://meetings.hubspot.com/christine106