(Guest blog from The Moxy Accountant)
Good financial reporting processes, impeccable bookkeeping and having a knowledgeable tax preparer on speed dial should be a priority to any business. I mean, we’re accountants, of course we’re going to say that! But when it comes to cannabis, we’ll double down on (and expand) this advice to our clients.
If you work in the cannabis industry (or want to invest in it) hopefully you’ve heard of 280E, the IRS tax code that disallows cannabis businesses from taking most ordinary business deductions. In layperson terms, that means any business who creates, processes, handles or sells cannabis is taxed at gross profit, not at net income like everyone else. This tax code creates a giant burden for the cannabis industry to grapple with and having a quality accountant who really knows their stuff is crucial. Not only will a good accountant keep your tax bill as low as legally possible, they should also have invaluable advice on how to manage your business expenses with taxation in mind to reduce your tax burden in the long run. Understanding 280E is just the start. Cannabis businesses face many complex issues, having an advisor who is willing to assist you with many different business challenges will be a key to your success.
Great! How do you find such a person, you ask? Here’s a few issues to think about as you interview an accountant or bookkeeper for your cannabis business.
Can they talk to you about their tax position in ways that you understand? Can they translate their research and understanding of tax laws in a way that provides solutions to your cannabis business?
It’s great to have an accountant or bookkeeper that is nerdy enough to make a tax return or set of books, but if they can’t tell you WHY they did what they did you won’t be able to use that information to make business decisions. Asking questions like “How do you approach applying 280E to a Profit and Loss?” or “Do you have a cannabis specific chart of accounts for my type of business?” are important to know the answers to. Once they say yes, then you can ask how their knowledge of tax / bookkeeping for this industry is going to help save your business money or provide solutions to problems you’re encountering.
Can they tell you about the specific state & local laws for your business?
Cannabis is highly regulated by each state. It’s also regulated very differently by each state. If your accountant works in a different state from you or works with cannabis businesses in multiple states, ask them about your local tax requirements. They should be able to tell you if your state’s income tax returns allow you to deduct the 280E expenses that the Federal return disallows. They should be able to know the sales tax rates and local corporate tax filing requirements for your state, or at least be able to work with you on learning the rules (as they are created). Things change quickly at the state level and having several sets of eyes tracking those changes is important.
What are their solutions for cash handling and documentation for cash based businesses?
For many decades we’ve been moving away from cash intensive businesses in accounting. We all love our debit cards! Accounting for the cannabis industry has been a rude awakening for many accountants. Traditionally, we rely on bank statements and credit card statements to do our jobs. That is often impossible with cannabis businesses. Cash based businesses are HARD to account for. There need to be robust processes in place when working with companies who don’t have access to banking. A good cannabis accountant will be used to working with clients who have difficulty accessing typical business solutions like banking, payroll, merchant service processing, and others. They will be familiar with any service providers who are cannabis friendly and will help provide solutions to maintaining your finances with or without these services. They should also understand your processes in cash handling and can make recommendations for documentation and efficiencies and making sure money doesn’t vanish out the door without you knowing about it.
Do they have nuanced advice about what type of business entity you should use (LLC, Partnership, S-Corporation or C-Corporation)?
An accountant should be able to give you thoughtful recommendations about what type of tax vehicle your business should use based on the specific facts and circumstances of your business set up. Just because you’re a cannabis business does not mean one type of entity is best for you, it depends on your personal situation. There are tax advantages and disadvantages to all of the business types. Make sure they can speak to WHY their suggestion is right for your business rather than a one size fits all approach.
Are they willing to offer you accounting education and guidance?
Cannabis is so highly regulated, you need someone who’s passionate about the industry to help keep you up to date on the changes you need to know for tax. A good tax professional will make time to explain tax issues to you and you should feel comfortable to ask any questions you have. There is no stupid questions in cannabis accounting, this stuff is complicated! Find a provider you feel comfortable with and who can talk to you about your financial situation in a way that makes sense to you.
Can they give you clear information about their fee structures and how they will bill you?
Good accounting is expensive. Bad accounting is twice as expensive! A good tax preparer or bookkeeper should be able to speak to their value AND their price in tandem. There is no reason to be paying 6x the amount of a traditional business to get your accounting done but the nature of the cannabis industry means it simply takes longer (and has more due diligence involved) to get things done. That’s not the end of the world, but anyone providing services to any business should be able to speak comfortably about their pricing structure AND what you will receive in exchange for their work. Make sure to get that information put into an engagement letter. It outlines both what you're paying and how much you should be getting in return.
Take Away
In short, accounting for your business is a necessary evil that can become a godsend with the proper perspective. A good working relationship with a qualified tax professional and a qualified bookkeeper are two easy ways to keep your business compliant, give you useful financial metrics and save you from all kinds of business headaches in the long run. In the cannabis industry, the need for qualified professionals is even more important because what you DON’T know about tax and bookkeeping CAN put you out of business. Finding the right professional may take a bit of effort on your part but is worth the work.
Finally, if you already have a bookkeeper or accountant you love but they don’t have cannabis experience, we have an excellent training program that will get them up to speed on everything then need to help you be successful. Send them to The Moxy Accountant to get them the training they need to level up in cannabis accounting.
Katye Maxson-Landis CPA, is the owner and founder of Moxy Accounting, a cannabis accounting firm in Portland, Oregon since 2012. She has a passion for teaching accountants and tax professionals about cannabis, the “jazz of accounting,” in her specialized training program, The Moxy Cohort.