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5 Common Accounting Problems Cannabis Businesses Face

by Hasum | | 420 Smoke Shop Near Me | 0 Comments

Key Players in Cannabis Businesses

When it comes to parenting, one saying puts it all into perspective, “It takes a village to raise a child.” In much the same way, it takes many different professionals to help cannabis business owners succeed. Achieving this goal isn’t something that you can do alone or even with just one trusted “right-hand man.”

Considering this industry is fiercely competitive and expected to become even more so, it takes the experience, knowledge, and dedication of many professionals to succeed as the owner of a cannabis business.

Legal Representation

For starters, the services of an attorney are vital to your cannabis business. This professional plays a key role in keeping your company aligned with current laws and regulations, which is essential since these can vary based on location and type of operation.

As the marijuana industry continues to grow and legalization expands, it’s likely that laws will change. So, you want a highly qualified attorney who can handle all the legalities of the business while you focus on increasing sales.

As with all outside help that you’ll need, you want to hire an attorney with years of corporate law experience. Beyond that, make sure the lawyer understands the cannabis market and its unique challenges.

Legal Representation

Insurance Coverage

As a cannabis business owner, you’ll also need to work closely with an insurance agency. Whether you grow pot or operate a dispensary, you need adequate protection. As with other organizations, licensed marijuana retailers, producers, dispensaries, and ancillaries can secure business insurance. 

For instance, owners of hydroponic shops typically have a policy against damages and claims. Most cannabis business owners have commercial property insurance, as well. That covers the physical structure for things like vandalism, theft, and fire.

Unfortunately, some people in the marijuana industry struggle to get insurance simply because it’s tightly regulated, fast-paced, and unpredictable. However, coverage is available. If necessary, your attorney can help with this.

These are both excellent examples of the help that you’ll need to achieve success and remain competitive. However, there’s yet another expert that plays a critical role – an accountant.

A licensed accountant plays a big part in keeping your business in order. Although some owners try to handle the books themselves, this seldom works. Whether you already have a cannabis business up and running or you’re thinking about starting one, it’s worth having a licensed CPA on your side. This professional handles finances for marijuana, concentrates, and other products sold.

Accounting Problems Specific to the Cannabis Industry

One of the best things you can do to grow your company is to understand the five most common accounting problems that cannabis business owners face. By hiring an excellent accountant, you won’t have to deal with any of these. At the same, having even basic knowledge can help you quickly identify an issue, including an accountant who’s not doing what you hired them to do on your behalf.

1. Improper Decoding of the IRC 280E Tax Code

The good news is that legal cannabis owners now get a lot of support from local and state governments. However, this is where things get a little confusing and complicated. While you can grow and sell pot in places where it’s legalized, the federal government still considers these actions illegal.

One of the most important tasks of an accountant is to decode the IRC 280E tax code. Specifically, this forbids cannabis businesses from taking expense deductions for trafficking Schedule I and II controlled substances. In other words, you can’t take a tax write-off for most of the things you paid for to open and operate your business.

That means as a cannabis business owner, you’ll likely pay substantially more in taxes compared to companies not associated with the marijuana industry. If you grow or farm weed, you can deduct some of your expenses. However, if you operate a dispensary, you’re out of luck.

Your accountant must maintain accurate records of what you spend on goods. This expert also needs to identify what expenses, if any, you can deduct. Although accountants perform multiple services, this is, without question, one of the most critical.

Failing to Hire the Right Accounting Firm

2. Failing to Hire the Right Accounting Firm

As the owner of a cannabis business, you can’t just hire any accounting firm. Sure, many throughout the country do an amazing job for their clients. However, your industry is unique. For that reason, you need to select a licensed accountant who specializes in the marijuana industry.

Only then will you feel 100 percent confident that your accountant has the required knowledge of current laws, regulations, and taxes. An expert with years of experience in both accounting and cannabis will ensure that your finances are in order and that the company remains compliant at all times. 

California was the first state to legalize marijuana in 2003 but only for medicinal purposes. Today, people can legally grow, sell, and buy pot for recreation. This particular industry is thriving. Even so, one accounting mistake could prove disastrous. So, the individual or firm you go with must meet two criteria: possess excellent accounting skills and have in-depth knowledge of the cannabis industry.

3. Struggling to Open a Bank Account

Considering marijuana is legal and a booming industry, this might sound like an odd problem. However, many owners have a hard time opening an account for their cannabis businesses. Here’s why. From a local and state government’s perspective, growing, selling, and buying pot is legal. However, the federal ban on cannabis is yet to be lifted. For that reason, many financial institutions remain reluctant to provide their services.

This is why so many cannabis business owners keep their money in a safe, whether at their dispensaries or in their homes. As a result, they usually have a lot of cash on hand. As you can imagine, that increases the risk of getting robbed or experiencing a business or home invasion.

Fortunately, by working with a reputable firm, your CPA can open a bank account for you. However, this entails a lot of expertise and paperwork. Along with getting an account set up, your accountant can advise you on ways to handle large sums of money.

4. The Black Cloud of IRS Audits

Another common problem that owners of cannabis businesses face has to do with IRA audits. Again, while this industry is legal in most places throughout North America, audits occur relatively often since growing, buying, and selling weed is illegal in the eyes of the federal government. That alone causes stress. Making it worse, you’ll never know when it’s your turn.

You want to eliminate any fear or anxiety of an IRS audit, so you can focus on growing your cannabis business. That’s where the right accountant can help. Keeping your company compliant and ensuring that you follow all the laws and regulations, you shouldn’t have any problem breezing through an audit. Having a reputable accountant working for you is the best way to avoid the IRS shutting down your operations.

5. Not Handling Payroll Correctly

Even if you only have one or two employees currently, with demand skyrocketing, you can anticipate your cannabis business growing quickly. At that point, payroll becomes an even more important task. However, as a cash-only business, this is another area that gets tricky.

An accountant will keep all your financial records current and accurate. They’ll oversee this aspect of the business to ensure that everyone’s paid correctly and that records are on the up and up. 

Hiring An Experienced Accountant

Hiring An Experienced Accountant With Knowledge of the Marijuana Industry

Here’s an important fact: Compared to other types of businesses, those in the marijuana industry have unique and specific accounting needs. This is why as a cannabis business owner, you want to hire someone who’s licensed, experienced, and knowledgeable of the marijuana industry. 

Whether you grow or sell weed for medicinal reasons, recreational purposes, or both, accounting is one aspect of the business you can’t compromise on. Demand for products in this particular market continues to skyrocket. A qualified accountant can help overcome obstacles so that your business can grow.

Hiring a niche accountant is highly advantageous. This professional will become your go-to source for a host of things. Along with tremendous insight, you want a CPA who has solid partnerships with various software and app developers. As a result, you can expect to get better service.

A reputable and trusted accountant ensures that your cannabis business has adequate control over inventory and cash. With a combination of an outstanding recordkeeping system and proven accounting controls, a CPA can help you start a business and then provide guidance as it begins to grow.

It all comes down to choosing a competent accounting expert. The individual you select should know everything the government requires. That includes the proper way to maintain financial records, the length of time to retain records, and both current and future laws and regulations.

Simply put, the expert you put in charge of the business finances should follow every government guideline to a tee. When researching and interviewing potential accountants for your cannabis business, you want to ask the right questions and, more importantly, get the right answers. Here are a few specific things to expect.

Monitor Business Progress

Accountants working for clients in the marijuana industry understand the critical nature of recording and maintaining accurate records. This responsibility is a priority. After all, these records help determine if a business is growing or becoming stagnant. 

If your cannabis business faces the latter problem, you and other members of your professional team can use the data to determine required changes to the operations.

Prepare Financial Statements

The accountant is also responsible for preparing financial statements. Included are profit and loss statements and balance sheets. Especially when dealing with your company’s bank or even creditors, you need up-to-date and accurate statements and having receipts as a backup.

Using cutting-edge software, this expert can enter specific information about expenses. Then, they can scan or screenshot all applicable receipts and store everything in one secure location.

Prepare Tax Returns

A qualified accountant will prepare your tax returns. With properly maintained financial records, they shouldn’t have any trouble with this. The accountant for your cannabis business will meet government deadlines and provide any requested information or documentation.

Prepare Tax Returns

Track Deductible Expenses

If you own a retail shop or dispensary, you probably won’t have many things to deduct. That’s one downfall to this cash-only business. Now, if you have a farm where you grow marijuana, you’ll likely have some deductible items. This is where a good accountant can help to identify any possible deductions.

Record Business Transactions

A large chunk of an accountant’s responsibilities is to organize and keep track of all business transactions. That entails listing specific information and having documentation or receipts as backup.

For peace of mind, hire an accountant who’s proficient in a top-of-the-line computer program. An excellent system should include several items, including those listed below.

  • Check distribution
  • Employee compensation
  • Business checkbook
  • Depreciation
  • Daily and monthly summaries of cash receipts

Another benefit of hiring an accountant who uses software is the ease of storing information. Since the government has specific retention periods for different types of business documents, this eliminates any risk of something getting deleted prematurely.

Watching Your Business Grow

Especially for the marijuana industry, doing things right goes a long way to achieving success. That means hiring a licensed accountant who understands the cannabis market and everything it entails. As mentioned, a qualified accounting expert will help you through rough patches and quickly identify anything that might cause an issue. 

1. Cannabis-specific tax laws

The problem:
Although cannabis has been legalized in many individual states, the United States government continues to classify it as a Schedule I substance at the federal level. While this creates problems for the industry in many ways, one of the biggest impacts is felt as a result of IRS Tax Code Section 280E. This one-sentence tax code stipulates that any business dealing with a Schedule I substance, i.e., cannabis, is prohibited from deducting those business expenses on their tax filings.
Tax Code Section 280E results in much higher tax rates for the cannabis industry since businesses are taxed on their gross income rather than their net income. However, there are exceptions to this tax code, and various states and local jurisdictions implement their state taxes differently around it, too. A cannabis business absolutely must remain 280E-compliant, or they risk IRS audits as well as potential fines or closures.

The solution:
Keep pristine records and accurate weekly bookkeeping. Utilize cannabis accounting services that ensure 280E compliance, as well as compliance with state tax laws and regulations.
When searching for accounting advisors it is absolutely imperative cannabis business owners opt to work with professionals who specialize in cannabis accounting. Cannabis accountants will ensure your cannabusiness remains 280E compliant and will navigate the various local, state, and federal tax codes for you.

2. Cash, cash, and more cash

cash accounting

The problem:
Cannabusiness owners often find themselves with what used to be considered a quality problem: too much cash. Because of cannabis’s Schedule I status, neither large banks nor merchant service providers (major credit card processors) will work with cannabis businesses. This resulted in cannabis businesses running overwhelmingly as cash-intensive businesses (as defined by the IRS).
However, cash comes with high costs, such as a high risk of theft and burglary, difficulties purchasing transporting goods, difficulties paying bills, and more. In addition, cash-intensive businesses are always under scrutiny from the IRS, with requirements such as, “document the flow of each receipt or revenue from the customer’s hands to the business, to the final end in the business bank account or as payment for a business expense”.

The solution:
Although credit cards are still off limits, there are now solutions for cannabis business owners to leverage debit and PIN-enabled credit cards, run eCheck/ACH payments, and more. Reducing the amount of cash on hand reduces the liability for cannabis business owners all around, as well as allows for more accurate bookkeeping.
Additionally, always hire cannabis accountants, i.e., accountants who also specialize in cannabis-specific accounting practices. Cannabis accounting advisors can find ways to minimize how much cash must be on hand, implement accounting solutions for large amounts of cash, and will maintain accurate and compliant cannabis bookkeeping. These professionals can also assist with payroll services and work with cannabis-friendly banking solutions.

3. High audit risks

The problem:
Remember IRS Tax Code Section 280E? Because of the much higher tax rate cannabis businesses face, cannabis businesses have become a lucrative target of the IRS. After a brief lull due to Covid-19, the IRS appears to have ramped up their audit efforts on cannabusinesses of all kinds. These audits are not only time-consuming and frustrating; they are also expensive. If a business is found with any tax liability, the penalties can be steep, if not fatal, to the business itself.

The solution:
Find comprehensive cannabis accounting services for your cannabusiness. When cannabis business owners work with cannabis accountants, they can be sure their weekly bookkeeping, payroll, internal audits, inventory, and more are documented, following all regulatory requirements, and in good hands. The risks of the audit are too high to leave your cannabis accounting needs to a homegrown or makeshift solution.

cannabis bank access

4. Working in an underbanked industry

The problem:
The cannabis industry as a whole is still chronically underbanked. As mentioned above, most large banks and merchant service providers will not work with cannabis companies. Until recently, this meant that cannabis business owners were left scrambling to find solutions for their businesses. Tasks such as writing a check for utilities are almost impossible when a business can’t obtain a bank account.
It is true in recent years there have been vast improvements to cannabis banking. However, many cannabusinesses remain underbanked, and bookkeeping for cannabis can quickly become too intensive for cannabis business owners to do themselves.

The solution:
Locate banking options for cannabis business owners. These banks and fintech are tailored to meet the unique regulatory and day-to-day needs of cannabis businesses. Cannabis accountants can leverage these solutions as well to ensure the upkeep of records, tax documents, and other accounting needs.

5. Professionals without cannabis expertise

The problem:
As a cannabis business grows, its needs grow with it. And when cannabis business owners partner with professionals without cannabis experience, even the most well-intentioned of alliances can turn sour quickly.
Between Schedule, I status ramifications, federal, state, and local cannabis tax law, cash-intensive businesses, and severe banking limitations – to name a few! – cannabis businesses can run into trouble when they work with professionals without cannabis experience. These errors can be extremely costly and/or time-consuming to fix at best, and fatal to a business at worst.

The solution:
Cannabusiness owners are forced to jump through many more hoops than non-cannabis business owners. This is why working with professionals steeped in cannabis experience is imperative. Accountabis Advisors not only understand the needs of cannabusiness owners but will provide solutions that keep them running smoothly and – most importantly – stay compliant with all regulations.
Accountabis Advisors are experts in both accounting and the cannabis industry. We can help provide solutions – and preventions – for all of these accounting problems cannabis business owners face.

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