Cannabis, Accounting, Cost of Goods, and Taxation

The 1,500-lawyer firm has been known in recent years for investing in technology and new legal service delivery methods, including spinning out a tech-focused managed services business, Gravity Stack, in 2018. In addition, consumers who are sensitive to toxins, pesticides, and heavy metals—and willing to pay a premium for organic products in other areas of their lives—may provide dispensaries with a new, broader market. The state’s medical patients will have to pay higher product costs to qualify for the tax relief, raising questions of the impact’s significance.

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Still, as a drug, cannabis retains the highest risk classification, along with heroin, LSD, and ecstasy, and is considered to have no proven medical benefit. According to these ratings, cocaine, methamphetamine, and fentanyl have a lower risk of abuse than cannabis. With more research into its medical benefits and lower potential for abuse, the pressure to reclassify cannabis will increase. Abraham Finberg, managing partner at AB FinWright, has worked in the cannabis sector since 2009, counseling clients in business advisory and tax, from start-up through M&A and IPO. The state considers most cannabis products to be of no medical use even though they are lab-certifiedand tested for potency, solvents and other contaminants.

Best Practices

For this to happen smoothly, what’s called a three-way matching system, where invoices and receipts are cross-referenced to ensure a clean match, can help guard against error as well as any potential suspicions of fraud. Implementing a regular process of review within your cannabis inventory accounting team is also a good idea, as is maintaining clear workflows before bottlenecks in the AP process build up and cause payment delays. Working effectively with newly established cannabis operations sometimes requires knowing how to help them enhance business functions. To advise on the creation of pitch decks and financial models aiming to raise funds, you will want to first understand the components of success specific to the cannabis industry. You should also be aware of the cannabis tax code system and potential upcoming alterations. The stringent Section 280E remains imposed on larger-scale cannabis commerce to financially deter businesses from entering expansive trafficking operations.

Understanding the Chart of Accounts (COA)

• As a CPA, if you let an outside wealth manager quarterback VFO services, your position (and influence) with the client is diminished.
• As mentioned above, one resource the IRS issued in conjunction with their new webpage is a Marijuana Industry FAQ.
• Further, it does not give personalized legal, tax, investment or any business advice in general.
• As states continue to individually craft and revise their cannabis laws, businesses must stay agile and compliant.
• Five Certified Public Accountant participants indicated that they do serve the cannabis industry.
• Compensation increases can be higher for more experienced workers or those with a certified public accountant, or CPA, license.
• This study provides a better understanding of the accounting and tax complexities of the cannabis industry as perceived by cannabis business owners and Certified Public Accountants who are already serving the industry.

A cash-intensive business requires some unique internal controls to safeguard the asset and to maintain adequate records of cash transactions (Frazer 2016). The IRS defines a cash-intensive business as one that receives most of its revenues in cash and/or pays many of its expenses in cash (Internal Revenue Service 2010). Cash may be stolen by employees and is most susceptible to theft when entering or exiting the business (Frazer 2016). One of the biggest questions potential clients ask me is, cannabis accounting “What do your cannabis accounting services cost? ” It’s a good question, and the answer depends entirely on their business, its complexity, and their needs — usually some combination of one-time fees like file reviews or set ups, and ongoing bookkeeping or advisory services. Because so many new cannabis business owners have lots of questions I’ve pulled together the common ones I hear so you can help prospective clients understand the ways accounting professionals can support their businesses.

Setting good expectations around building good financial controls early

We not only understand cannabis tax law and accounting practices, but we also assist with the operational side of your business. Our goal is to help you succeed in business and achieve financial security now and in the future. This study provides a better understanding of the accounting and tax complexities of the cannabis industry as perceived https://www.bookstime.com/ by cannabis business owners and Certified Public Accountants who are already serving the industry. This study also provides explanation as to why Certified Public Accountants are reluctant or unwilling to serve the cannabis industry. This study has important implications for the public accounting profession as well as the cannabis industry.

Top Tax & Accounting Challenges for Cannabis Operators

This lack of banking options subjects cannabis businesses to multiple issues, including internal and external theft, misallocation of funds, payroll, and insurance paid in cash. Marcum’s Cannabis Services professionals are trusted advisors who enable cannabis clients in every segment of the industry – from seed to sale – to manage the highly complex tax and accounting issues that are unique to cannabis. The cannabis industry remains in limbo with state laws in conflict with federal law. The findings of this study indicate that, while many Certified Public Accountants will not serve the cannabis industry, there are competent and knowledgeable Certified Public Accountants who will. Quantitative studies could be designed to obtain data from a larger sample size than is possible with a qualitative study.

• Simple conversations can be more productive than large networking events where everyone is clamoring to get the attention of clients.
• Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services.
• Lastly, the free 15-minute consultation serves as a stepping stone to the comprehensive range of accounting services that Cannacctg offers.
• Cannabis-related businesses are often misunderstood, misrepresented, and underserved by the merchant and professional services community.
• A cash-intensive business requires some unique internal controls to safeguard the asset and to maintain adequate records of cash transactions (Frazer 2016).
• The evolving cannabis industry presents unique financial management challenges that require precise and strategic accounting for cannabis operations.

The Chart of Accounts (COA) helps organize your finances, increases internal accountability, and gives investors, auditors, and shareholders a clear view of your business finances. While it might seem like cannabis bookkeeping would negatively impact your chances of better future opportunities, the cannabis industry is a legitimate one in many states. QuickBooks is the go-to solution for any business’s accounting and bookkeeping needs. Excel is a basic-but-good tool for cost accounting, reconciliations, consolidations, and so on.

They’ll also work with the company’s business units and with its internal controls team, Sanders said. Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services. At University of Chicago Law School, Robbins was a software engineer and holds a master’s degree in electrical engineering and computer science from Massachusetts Institute of Technology.

• The more details you provide for each transaction, the easier it will be for your accountant to have the time to achieve the more thoughtful assignment of CoGS concerning your taxes.e more thoughtful assignment of CoGS concerning your taxes.
• NACAT Pros provides educational tools for accountants and financial professionals to enter into the Cannabis industry for untapped professional potential.
• It is also a good idea to have two people do the cash collection and reconciliation separately to lower the chance of theft.
• For optimal expense management, think of vendors and their performance like any other part of the business, which is to say, under regular evaluation.
• In addition, consumers who are sensitive to toxins, pesticides, and heavy metals—and willing to pay a premium for organic products in other areas of their lives—may provide dispensaries with a new, broader market.

What is the general takeaway of the IRS adding these webpages?

Lastly, a key decision in cannabis accounting is determining which costs should be expensed (recognized immediately in the income statement) and which should be capitalized (added to the asset’s cost base and expensed over time). This study has several limitations including limited external validity and potential selection bias. The views of the interviewees may not necessarily generalize to all CRB owners or Certified Public Accountants in these two states or other states. However, repetition of themes indicating data saturation is a good indication that the responses would be similar if more CRB owners or Certified Public Accountants were interviewed. Finding participants for the study was difficult as many of those invited declined to participate. The convenience sample drawn could have introduced some level of selection bias into the study.