Accounting for Cannabis Dispensaries
Cannabis businesses are becoming increasingly popular across the United States as more and more states legalize its use for medical and recreational purposes. However, with the growth of the industry comes unique challenges for accounting professionals, particularly for those working with cannabis dispensaries.
From cash control and management issues to proper reporting and compliance with tax regulations, accounting for cannabis dispensaries is not an easy task. A single mistake can result in large penalty fees, legal trouble, or even the shutdown of the business. Unfortunately, many cannabis CEOs and business owners are relying on inexperienced accounting teams and are unknowingly putting their companies at risk.
Accounting professionals who are new to serving the cannabis industry may find themselves in a bind when trying to rely on accounting controls that do not work in the highly-regulated niche. The cannabis industry requires specific internal controls, including immaculate records of all payments, daily cash counts, and the proper segregation of duties. Many CPAs and accountants currently serving licensed cannabis businesses may not realize how far behind they have gotten and may miss opportunities to properly reduce their clients’ tax liability.
Challenges in Cannabis Accounting
One of the biggest challenges for cannabis businesses and accounting professionals is compliance with IRC 280E, the Internal Revenue Code section that precludes cannabis dispensaries and other cannabis touching businesses from being able to take ordinary tax deductions and credits other than Cost of Goods Sold. According to the Legal Information Institute, IRC 280E says the following: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Despite the increasing number of states legalizing cannabis use, it is still classified as a Schedule 1 substance. As such, any business that distributes, owns, or processes cannabis products is technically “trafficking” it, regardless of the intent. Therefore, the options for reducing tax liability are greatly reduced for cannabis companies.
While one tax code makes it impossible for cannabis businesses to take deductions and credits the way traditional companies do, another IRC code serves as part of the solution. By relying on IRC 471, accountants can determine which costs can be allocated via cost accounting to inventory and eventually, to Cost of Goods Sold (COGS). However, this process is complex, especially for cannabis dispensaries that are also producing goods and can utilize this code section.
It is essential for everyone in the licensed cannabis space to know that there is no getting around 280E. The IRS is more aware now than ever of the games and tactics being used to try to circumnavigate it. Based on information gathered from documents released in response to a FOIA (Freedom of Information Act) request, on April 12, 2021, Cannabis industry publication MJ Biz Daily published a research abstract that showed just how adept the IRS has become at conducting audits of cannabis businesses. Their adroitness has enabled them to collect “two to four times as much in unpaid taxes, or revenue – as the agency did from mainstream companies also identified as ripe targets for audits in a given fiscal year.” Auditing more cannabis businesses makes sound business sense.
The Value of a Cannabis CPA
Providing cannabis business clients with real value requires implementing specific processes, including annual, quarterly, monthly, and daily procedures for dispensary accounting that accord with 280E. In cannabis accounting, the only way to correctly minimize tax liability is the hard way. There are no shortcuts and no magic formulas.
Dispensaries have unique challenges in the cannabis industry that require special attention from accounting professionals. Compared to other verticals in the industry, such as cultivation and processing/manufacturing, dispensaries face even more hurdles. The IRS is especially strict with dispensaries, which makes it crucial for accounting professionals serving cannabis businesses to keep track of their clients’ inventories. Failure to do so could result in an IRS audit that could cause significant problems for the dispensary. Therefore, tracking inventories through weekly cycle counts and reconciling them to POS and seed-to-sale systems is essential.
Cash controls are another significant issue that cannabis dispensaries must address. Setting up effective controls and procedures is crucial for dispensaries, as banking options for cannabis companies are essentially non-existent in many states. Although this is slowly changing, local licensing authorities hold dispensary owners accountable for creating and maintaining adequate security measures to prevent theft.
Additionally, most accounting software is not cannabis-friendly, which makes it difficult to perform proper accounting and legally minimize clients’ tax liabilities. However, cannabis accounting professionals like The Canna CPAs have developed and perfected cannabis-specific chart of accounts and highly specialized accounting workpapers for the cannabis industry, including those dispensary-specific charts of accounts and workpapers to do proper accounting.
In conclusion, accounting for cannabis dispensaries requires special attention to detail and adherence to strict guidelines. With careful inventory management, cash controls, and cannabis-friendly accounting tools, cannabis CPA professionals can help dispensaries navigate the complex world of cannabis finance and minimize their tax liabilities.
To learn more about how The Canna CPAs can help you overcome these challenges and succeed, call us at 833-CPA-CANA or 833-272-2262.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.
