On the heels of the AICPA’s 2023 Agriculture and Cannabis conference, little improvement has been made in the cannabis industry in terms of accurate accounting and tax reporting. While the AICPA doesn’t host the only cannabis industry training for accountants, it’s still only one of a few, and even fewer accountants are actually serving the industry and doing it well.
Cannabis presents a number of industry specific challenges when it comes to accounting and taxes. For one, the infamous tax code IRC 280(e), originally developed to address the illicit dealings of major criminal organizations, prevents state legal cannabis businesses from deducting normal operating deductions on their federal returns. To make matters more complicated, many states have passed legislation to de-couple from 280(e), making tax preparation even more challenging and time consuming for preparers. Add in the risk of audit, and the industry hasn’t attracted an abundance of professionals.
The professionals that have jumped in at this point seem mostly starry eyed at the “green rush” (a pun on the gold rush) of the new industry and expect huge profit margins in return for their efforts. The actual result though is a lot of mis-guided mediocre work.
Cannabis bookkeeping and tax preparation is significantly more time consuming than your average small business. For one, to maximizing tax savings, cannabis businesses must comply with IRC 471 and follow GAAP based cost accounting rules to correctly account for inventory and cost of goods sold. Failure to do so prevents the allocation of significant indirect costs from being added to the inventory and ultimately to cost of goods sold.
Some of the biggest misgivings in the industry is coming from accountants and bookkeepers still convincing cannabis clients they can keep their books and file their returns on the cash basis. In addition, a vast majority of cannabis tax returns are being filed incorrectly with deductions still being included.
If you haven’t worked in the cannabis industry, it would be easy to review it as a cash cow. But the reality is that even multi-million-dollar, multi-state organizations are squeezed by a plethora of issues including high income and sales taxes, limited staffing, difficulty accessing banking or time-consuming bank compliance rules, limited to no access to credit card transactions and a heap of state licensing requirements.
What can the accounting industry do? State legal cannabis businesses are legitimate businesses like anyone else. On top of that, many are family owned and their business is their livelihood, retirement plan, and college savings investment. If anyone needs advice, these business owners definitely do. Most are excellent at their craft, but not trained businesspeople and GAAP accounting far exceeds their ability to categorize some transactions in QuickBooks. The accounting industry needs to be doing more in the way of education and training as well as demanding answers from the IRS as to how to properly prepare returns for these clients.
Unfortunately, a once per year three-day conference with a $2,000 price tag isn’t going to cut it when it comes to training the next wave of advisors as to how to best serve the cannabis industry. CPE needs to be made available that gets into the nitty gritty details of what these businesses deal with on a daily basis.
Unless you’ve spent your accounting career specializing in manufacturing businesses, your cost accounting skills are probably a little rusty and the nuances of indirect and direct inventory costs can literally mean the difference between success and failure for some of these small cannabis businesses.
While it may seem like a risk to jump into, cannabis businesses are definitely in need of more high quality tax accountants and bookkeepers who are committed to learning the industry, the rules related to it, and serving them well.