If cannabis accountants were to compile a list of ‘frequently asked questions’ about our jobs, the query mentioned in the title of this article would rank number one on the list. Cannabis accountants are specialists, but the precise nature of the services we provide is often not well understood.
The fundamental training that cannabis accountants receive is the same as that of general accountants. But once a person makes the decision to specialize in cannabis, they should be prepared for the daunting responsibilities this choice will entail. Complex rules and regulations are standard in the cannabis industry, changing from state to state, and the federal prohibition of the plant remains a huge hurdle to normalization, in accounting as in everything else.
With Cannabis, it´s State by State
When you hire a qualified cannabis accountant, you’ll be choosing a specialized service provider who will customize our recommendations according to the legal and financial requirements in your state. We know how to untangle the complicated web of state and local laws and licensing requirements that will regulate the cannabis trade in your jurisdiction. This is a responsibility that general accountants don’t have to worry about, since industries that don’t occupy the murky borderland between the legal and the prohibited are governed by more clear and consistent rules.
Needless to say, the picture becomes even more complicated if you have growing, manufacturing or retail facilities in multiple states. Trained and experienced cannabis accountants understand the immense challenges this situation can create, as you’ll have to deal with varying and conflicting legal requirements. A general accountant will never encounter such confusing circumstances even if they are employed by a large corporation that has establishments or facilities in several states.
Section IRC 280E: An Achilles Heel for Cannabis
Like all business owners, cannabis entrepreneurs seek to minimize their tax liabilities to ensure maximum profitability. However, unlike other business owners, their operations are subject to Section IRC 280E of the Internal Revenue Service tax code, which prohibits businesses from deducting expenses derived from the sale and distribution of Schedule I or II controlled substances.
This code has no relevance to general accountants. But it is a primary influence for cannabis accountants, who must understand all the restrictions that stop cannabis companies from claiming tax breaks that other businesses take for granted. Cannabis accountants must understand all the specifics of 280E and their potential ramifications. We must have the knowledge and expertise to help our clients use the deductions that are available while preventing our clients from mistakenly claiming the long list of those that aren’t.
Section IRC 280E of the IRS code has little to do with most businesses and no relevance to the accountants who work for them. Most accountants will never have to give this regulation a second thought since they’re working for industries that don’t sell products that are deemed illegal at the federal level. Their clients won’t face the intense scrutiny that is so often targeted at cannabis entrepreneurs, who are in essence assumed to be guilty of violating IRS rules or regulatory standards without any evidence showing this to be true.
Cannabis accountants are responsible for protecting our clients against running into trouble during an audit, which could come at any moment. General accountants also must help their clients keep their financial records in order in case an audit occurs, but in cannabis, an IRS audit must be considered an eventuality, not just a possibility. The same can’t necessarily be said of businesses outside the cannabis industry.
In Cannabis, it’s Always Buyer Beware
The cannabis industry is profitable, but it hasn’t been around nearly as long as most other established industries. Consequently, it remains a relatively volatile sector of the economy, where sales, mergers, acquisitions, divestitures, refinancing and restructuring requests, and new business openings are all still quite common. In 2022 merger and acquisition deals worth $3.2 billion were completed, and just a year before that an astonishing $10.3 billion was channeled into M&A as dispensaries, manufacturing plants and growing and harvesting facilities changed hands at a fevered pitch.
Cannabis is still a new economic frontier, where the future of individual companies and the industry as a whole remains undecided and uncertain. As an entrepreneur in this volatile industry, you may stay for the duration or you may ultimately decide to sell, and that is another reason why a cannabis accountant is a more appropriate choice than a general accountant.
Companies and individual entrepreneurs who invest in cannabis are only interested in buying businesses that have implemented proper accounting procedures appropriate for this complex industry. Cannabis accountants understand the processes and procedures that retailers, manufacturers and growers must rely on to remain fully transparent and compliant, and that will be reflected in the precise and pristine books they keep.
Simply put, you’ll be attractive to potential buyers if you have your financial house in order. But if they notice any questionable or slipshod practices that suggest your record keeping is anything less than 100% transparent, they will flee in the other direction.
A Cash-Only Affair in Cannabis
One of the biggest dividing lines between cannabis companies and other businesses is the difference in access to banking services.
As stated by the American Bankers Association, “Currently, thirty-seven states, the District of Columbia, Guam and Puerto Rico have all legalized the use of marijuana to some degree. Yet the possession, distribution or sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk.”
Unsurprisingly, these concerns have made it hard for cannabis companies to find banks willing to handle their accounts in most states. As a result, they are forced to deal exclusively in cash, regardless of the size of their business interests.
This is an anachronistic business model, but one cannabis entrepreneurs are forced to adopt out of necessity. In a cash-only business, compliance with the rules and regulations becomes more of a challenge than usual, as accounting departments must implement processes to track and manage money that are accurate down to the last penny (in cannabis violations of the rules can be punished harshly) as well as conform to metrc. Exclusively using cash creates additional concerns that other businesses are far less worried about, such as the possibility that funds might be misplaced, misallocated or outright stolen. (In a future blog, I’ll talk about fraud in the cannabis industry.)
Unlike general accountants, cannabis accountants must implement processes and procedures suitable for a business that handles only cash. The advanced knowledge of the cannabis accountant is essential in these instances to ensure compliance doesn’t become a problem and that audits can be completed without any issues, despite the extraordinary complications that can arise in cash-only enterprises.
Audit Ready from Day One
An accountant who works in a more traditional business doesn’t necessarily have to understand every aspect of that business or its industry right out of the box. This is in contrast to the cannabis accountant, who must know how to keep their clients compliant with all the rules and regulations from day one.
Even a tiny bit of ignorance could get your client in deep trouble with the IRS or some regulatory agency, and the consequences of this can be far more dire than slip-ups in other industries. Cannabis accountants specialize in audit protection and preparation because cannabis businesses are at extraordinarily high risk for audits and because the perils and pitfalls of failing one are too unpleasant to contemplate.