Cannabis Business Accounting

Today I would like to talk to you about cannabis related businesses. There are many challenges that the cannabis industry is facing right now and a good CPA can help you manage that. We could do a whole series of videos about the cannabis industry and about the implications of being in that line of business, as well as, the tax ramifications per the current tax code. But for now in this video, we are going to do an overview of some of the key points about why you should hire a competent CPA to help you with this industry.

If you have any questions, comments, or ideas for future videos, please let us know.

Article - Cannabis Business Accounting

First and foremost, the cannabis industry has the potential to become a multi-billion dollar industry in the next few years. As we just saw in the recent midterm elections, Utah, voted to legalize medical marijuana in their state. We now have a handful of states and more to come that have legalized recreational and medicinal marijuana; it is probably only a matter of time before even more states make that determination as well.

As CPAs we need to be on our game and know exactly how to help these businesses. Currently, this is an industry that is very underserved because there are a lot of CPAs who are choosing not to do business with people in this field. Sams CPA on the other hand embraces these businesses and knows that those in this industry are going to need good help and competent advice when navigating the very difficult waters ahead.

With that said, one of the biggest issues right now for the cannabis industry is section 280E. Section 280E is is an old code section that essentially says that the income derived from any illegal trade or business (cannabis/marijuana is still considered a Schedule 1 substance at the federal level so it is still a considered an illegal narcotic)....so any income derived from an illegal trade or business should be reported and taxed.

Here is the challenge, you are only able to offset that income with your cost of goods sold. Therefore, 280E says if I am a cannabis cultivator or I am a dispensary I cannot deduct my insurance premiums, I cannot deduct my marketing, I cannot deduct a lot of things. I can only deduct my direct cost of goods sold. That is a challenge. That is a problem. However, there is one silver lining that we have going for us and that is in Code Section 263A. Sorry to throw all these code sections out there at you. It is not necessarily important that you memorize what they say but that you know those key words when talking about the financial and tax ramifications in this industry. Section 263A says that anyone who is in a manufacturing business, or is producing things, or carries inventory, is able to allocate and should allocate a certain amount of their indirect costs to their inventory. So, 263A is our mechanism for combating the negative effects of 280E. In other words, 280E says we can only deduct direct costs, 263A says we can make an allocation of indirect costs against our inventory and include that in inventory which then becomes cost of goods sold.

It is super important, if you are operating in the cannabis industry that you have a CPA who knows this business. A CPA who knows how to properly do these allocations and document them. Especially because we are also going to see a lot of scrutiny at the state level. States as well as the federal government have specific regulations for how things are supposed to be done. You are going to have to be in conformity with these regulations and a lot of that comes down to your accounting. Is your accounting in conformity with the state laws, and does it support 280E, 263E justifications?

The second challenge in the cannabis industry is transacting funds. How do I get paid? How do I pay people? How do I bank? Can I bank? How do I accept credit cards, debit cards? Eventually we will do a whole other video about this particular topic. In the meantime we keep coming back to that Schedule 1 narcotic issue; whereby, selling marijuana is illegal at the federal level. As a result, most banks are not doing business with people in this industry. However, there are mechanisms for transacting payments that are out there, such as cryptocurrency. For more information on this, check out our other video on cryptocurrency. If you are planning on using cryptocurrency, you need to be sure that you know how it is taxed and how to properly account for it. For instance, if you accept a cash payment in excess of $10,000 there is a form that has to be filed with the IRS each time this occurs. A good CPA who has industry experience is going to know that and they are going keep you on top of it so that you are in compliance.

To cap it off, if you are interested in starting a business, especially a cannabis related business in this market, each state has an application process. Each state has requirements for how records have to be kept. You need a good CPA from the start that will help you navigate that process and show you the right way to go.

If you have any questions, comments, or ideas for future videos, please let us know.

####