The cannabis industry is growing exponentially. Every year more states legalize its use, and support for federal legalization continues to swell in the United States. Recent estimates predict legal sales of cannabis to top $33 billion by the end of 2022, up from $25 billion in 2021, with no signs of slowing down.
Unfortunately, this is not all good news for cannabis business owners. Due to the size and growth of the industry, more and more regulatory agencies are turning their eyes on cannabusinesses, which has in turn heightened the need for cannabis accountants to ensure these businesses stay compliant and operating.
As cannabis business owners search for accounting solutions, they often find their accounting needs are quite different from those of non-cannabis industries and require specialized cannabis accounting services and advisors. Let’s dive into a few ways cannabis accounting is different.
As it stands, cannabis remains a Schedule I prohibited substance by the federal government. And while this has unfortunate and far-reaching effects on the entire industry, there is one particular tax code provision all cannabis accountants must account for: IRS Tax Code 280E.
This industry-infamous tax code prohibits any business dealing with a Schedule I substance (i.e., cannabis) from deducting business expenses from their gross income on their tax filings, a difference from almost every other industry. If a cannabis business fails to remain IRC 280E-compliant the penalties are steep and could include: fines, hefty legal fees, back taxes + interest, and even potential closure of the business itself.
Cannabis accountants must be well-versed in 280E, as this is not a provision most businesses must handle. And while the tax implications are daunting for cannabusiness owners, there are still certain deductions available to reduce a business’s tax burden. Navigating the complexities of the federal as well as the local and state sales, state, and recreational use taxes is no longer a task most cannabusiness owners can manage on their own and requires specific cannabis accounting knowledge to keep businesses compliant and running.
Accountants working in the cannabis industry must also be ready to work in an industry that is extremely prone to IRS audits. One reason is that because of IRC 280E, cannabis companies’ tax burden is much higher, which makes them more lucrative targets compared to other businesses for the IRS as there are larger taxes to collect. Another is that because of the complexity of federal, state, and local tax regulations and codes, it is too extremely easy to make errors, which result in fines and penalties for the government. Working in such a highly audited industry is another challenge for cannabis accountants.
Until very recently cannabis companies were unable to obtain banking or merchant services entirely. This meant that almost the entire cannabis industry was operated in pure cash. Luckily there have been vast improvements in the cannabis banking and payment landscape in recent years, but much of the industry’s companies still operate with much higher-than-normal amounts of cash. Cannabis accountants must be ready to manage, report, and advise on how to handle all aspects of the cash flow in order to remain compliant.
By now it should be clear that the accounting needs of cannabis companies differ from those of other industries. Because of these industry-specific accounting needs most standard accounting software tools simply cannot adequately capture and maintain this information. This is especially true in an emerging industry where regulations and requirements can change overnight, and companies need to be able to move and pivot quickly. Recently the proliferation of cannabis-specific banking tools and accounting software and advisors has allowed cannabis businesses to meet their full potential without the worry of failed audits, compliance issues, or bookkeeping headaches.
Cannabis accounting services require specialized accounting and cannabis knowledge. If you have questions about your accounting software for your cannabusiness, Accountabis Advisors can help. Reach out today to learn more about how we can help you through the tangled web of cannabis accounting.
