First, the good news: cannabis businesses are growing, and fast. Now, the not-so-good news: so are their accounting problems.
Cannabis businesses face a few extra layers of complexity when it comes to their accounting needs. Unfortunately, there are a few accounting problems that are both particularly troublesome and common in the industry. This brings us to the best news yet: there are solutions for each and every one of these.
Although cannabis has been legalized in many individual states, the United States government continues to classify it as a Schedule I substance at the federal level. While this creates problems for the industry in many ways, one of the biggest impacts is felt as a result of IRS Tax Code Section 280E. This one-sentence tax code stipulates that any business dealing with a Schedule I substance, i.e., cannabis, is prohibited from deducting those business expenses on their tax filings.
Tax Code Section 280E results in much higher tax rates for the cannabis industry since businesses are taxed on their gross income rather than their net income. However, there are exceptions to this tax code, and various states and local jurisdictions implement their state taxes differently around it, too. A cannabis business absolutely must remain 280E-compliant, or they risk IRS audits as well as potential fines or closures.
Keep pristine records and accurate weekly bookkeeping. Utilize cannabis accounting services that ensure 280E compliance, as well as compliance with state tax laws and regulations.
When searching for accounting advisors it is absolutely imperative cannabis business owners opt to work with professionals who specialize in cannabis accounting. Cannabis accountants will ensure your cannabusiness remains 280E compliant and will navigate the various local, state, and federal tax codes for you.
Cannabusiness owners often find themselves with what used to be considered a quality problem: too much cash. Because of cannabis’s Schedule I status, neither large banks nor merchant service providers (major credit card processors) will work with cannabis businesses. This resulted in cannabis businesses running overwhelmingly as cash-intensive businesses (as defined by the IRS).
However, cash comes with high costs, such as a high risk of theft and burglary, difficulties purchasing transporting goods, difficulties paying bills, and more. In addition, cash-intensive businesses are always under scrutiny from the IRS, with requirements such as, “document the flow of each receipt or revenue from the customer’s hands to the business, to the final end in the business bank account or as payment for a business expense”.
Although credit cards are still off limits, there are now solutions for cannabis business owners to leverage debit and PIN-enabled credit cards, run eCheck/ACH payments, and more. Reducing the amount of cash on hand reduces the liability for cannabis business owners all around, as well as allows for more accurate bookkeeping.
Additionally, always hire cannabis accountants, i.e., accountants who also specialize in cannabis-specific accounting practices. Cannabis accounting advisors can find ways to minimize how much cash must be on hand, implement accounting solutions for large amounts of cash, and will maintain accurate and compliant cannabis bookkeeping. These professionals can also assist with payroll services and work with cannabis-friendly banking solutions.
Remember IRS Tax Code Section 280E? Because of the much higher tax rate cannabis businesses face, cannabis businesses have become a lucrative target of the IRS. After a brief lull due to Covid-19, the IRS appears to have ramped up their audit efforts on cannabusinesses of all kinds. These audits are not only time-consuming and frustrating; they are also expensive. If a business is found with any tax liability, the penalties can be steep, if not fatal, to the business itself.
Find comprehensive cannabis accounting services for your cannabusiness. When cannabis business owners work with cannabis accountants, they can be sure their weekly bookkeeping, payroll, internal audits, inventory, and more are documented, following all regulatory requirements, and in good hands. The risks of the audit are too high to leave your cannabis accounting needs to a homegrown or makeshift solution.
The cannabis industry as a whole is still chronically underbanked. As mentioned above, most large banks and merchant service providers will not work with cannabis companies. Until recently, this meant that cannabis business owners were left scrambling to find solutions for their businesses. Tasks such as writing a check for utilities are almost impossible when a business can’t obtain a bank account.
It is true in recent years there have been vast improvements to cannabis banking. However, many cannabusinesses remain underbanked, and bookkeeping for cannabis can quickly become too intensive for cannabis business owners to do themselves.
Locate banking options for cannabis business owners. These banks and fintech are tailored to meet the unique regulatory and day-to-day needs of cannabis businesses. Cannabis accountants can leverage these solutions as well to ensure the upkeep of records, tax documents, and other accounting needs.
As a cannabis business grows, its needs grow with it. And when cannabis business owners partner with professionals without cannabis experience, even the most well-intentioned of alliances can turn sour quickly.
Between Schedule, I status ramifications, federal, state, and local cannabis tax law, cash-intensive businesses, and severe banking limitations – to name a few! – cannabis businesses can run into trouble when they work with professionals without cannabis experience. These errors can be extremely costly and/or time-consuming to fix at best, and fatal to a business at worst.
Cannabusiness owners are forced to jump through many more hoops than non-cannabis business owners. This is why working with professionals steeped in cannabis experience is imperative. Accountabis Advisors not only understand the needs of cannabusiness owners but will provide solutions that keep them running smoothly and – most importantly – stay compliant with all regulations.
Accountabis Advisors are experts in both accounting and the cannabis industry. We can help provide solutions – and preventions – for all of these accounting problems cannabis business owners face.
Contact us today to learn more about our cannabis accounting services.