Maintaining proper accounting records is arguably the most important part of operating a cannabis business in the United States. All ten of the CRBs had Certified Public Accountants that did their federal income tax filing. Five described their relationship with their Certified Public Accountant as being like an out-sourced CFO. The study utilized the five steps of the data analysis process from Creswell and Creswell (2018).
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- “Whenever you have a new industry, you’ll get scammers — small businesses need CPA protection, too,” he noted.
- Five Certified Public Accountant participants indicated that they do serve the cannabis industry.
- Last, the Certified Public Accountant could modify the engagement letter to clarify expectations regarding staying in compliance with all state and local regulations and federal tax code.
- Interviews of participants from states that are newer to the cannabis marketplace may result in findings that are different from the findings of this study of two mature cannabis states.
- That’s feeding the fact that 8 out of 10 Americans want access to medical cannabis because of that research and results.
In cannabis, you start with a raw material which is a seed or a clone, and the cost of this raw material is often $0 (or very little). From there, many clients have a process that is 4-6 months to get this seed to actual sale including growing, replanting, flowering, watering, light issues, harvesting, drying, curing, lab testing, and finally ready for sale. Businesses handling cannabis face varied federal tax rates and special taxations, like the cultivation tax.
Common Accounting Problems That Cannabis Businesses Face
Our Nationally Recognized Cannabis and CBD Accounting program has helped over 800+ accounting professionals get started quickly, and build their accounting practices past six figures in under 90 days. 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 https://www.bookstime.com/ the components of success specific to the cannabis industry. For this reason, small business owners tend to accept tax inefficiency and lean toward C-corp entity structures designed for larger businesses. While smaller entities would traditionally pursue the pass-through format, they increasingly prefer to incur higher taxation to maintain financial freedom and keep their personal income free from the perceived reputation of cannabis.
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Another significant tax issue to consider is the allocation of costs in a business that includes not only the production or sale of marijuana but also activities outside the scope of Sec. 280E. The Washington State Liquor and Cannabis Board publishes a report of monthly “Sales Activity by License Number.” For December 2018, 433 cannabis licenses reported sales activity. The 433 license numbers were then cross referenced to the “Washington Listing of Marijuana Applicants” report which provides company names, addresses, and phone numbers. Since phone numbers were readily available on this report, phone calls were made to request participation from randomly selected licensees throughout the list. The Colorado Board went on to caution Certified Public Accountants that their Position Statement does not constitute an endorsement for Certified Public Accountants to enter the industry (Colorado Board of Accountancy 2015). Cannabis and hemp are both varieties of the cannabis plant but with different THC content.
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Cannabis businesses are also greatly affected by the Bank Secrecy Act (BSA) and anti-money laundering regulations that are designed to help identify and report money laundering activity (Sanders 2015). The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, exists to “safeguard the financial system from illicit use and combat money laundering” (Financial Crimes Enforcement Network n.d.). In practical terms, FinCEN guidance stated that providing banking services to cannabis businesses was illegal and required banks to self-report this federally illegal activity (Houser and Rosacker 2014; Shu-Acquaye 2016).
To comment on this episode or to suggest an idea for another episode, contact Neil Amato at -cima.com. Expanded Employee Retention Credit (ERC) & how our professionals can assist you. Rather than seeing technology solely as an opportunity to automate processes, capitalize on the pitfalls of technological advances to offer additional value to your client. Becoming a specialist in a specific accounting area, like cannabis, can enhance your skills and future. Get your ebook here and get up to speed on accounting for your business. This site is brought to you by the Association of International Certified Professional Accountants, the global voice of the accounting and finance profession, founded by the American Institute of CPAs and The Chartered Institute of Management Accountants.
Due to the increasing number of states legalizing cannabis in one form or another, the industry is evolving rapidly. Some estimates put the legal market for cannabis at more than $70 billion — more than corn and cannabis accounting wheat combined — by 2027. CPAs will be needed to provide sound financial advice and support to cannabis businesses. Cost of inventory includes raw materials, Work in Process (WIP), and Finished Goods (FG).
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- Constantly shifting state rules and regulations make it difficult for dispensaries and cannabis businesses to maintain a legitimate financial structure.
- Unfortunately for cannabis retailers, the usual tax exemptions don’t apply.
- But this doesn’t mean anything if you don’t keep accurate sales records.
- The Certified Public Accountant needs to have more than just a cursory knowledge of the industry, but rather have an in-depth understanding.
Why is accounting important for cannabis businesses?
- To supplement your inventory and cost accounting, you may also be tempted to use an enterprise resources planner (ERP) program.
- Like any other business, the cannabis business could lose money because of unexpected costs, such as a rise in the price of goods or even a lawsuit.
- Problematically, many banks will not open accounts for cannabis businesses.
- Businesses in any industry need to have an accountant, but the cannabis industry needs it even more.
- Finally, the CRB may want to consider how the Certified Public Accountant will be able to assist as the cannabis business matures.
- They’re swimming around in their funds at different times without understanding how to expand their benefit, settle proper taxes, and read what the numbers in their books mean for their general productivity.
- The Certified Public Accountant should make the potential client aware of the expectations regarding compliance with all laws and regulations with specific emphasis on 280E and tax compliance.