by Sarah Ratliff

Accounting is a knowledge-based profession. Accountants possess highly specialized and detailed knowledge about financial record keeping, which makes them indispensable for business owners who don’t have the training and education necessary to implement proper accounting procedures all on their own.

This description is accurate, but it doesn’t quite capture the complexity involved in working as a cannabis accountant. 

Meet Your Savvy and Experienced Cannabis Accountant

Cannabis companies are heavily scrutinized and strictly regulated. If they aren’t rigorous in their efforts to comply with the rules they can run afoul of the IRS, state government tax collection agencies and regulatory boards. This is a direct consequence of the fact that cannabis is still prohibited at the federal level, which among other things, forces states and communities to make up their own rules to govern cannabis licensing, growing, harvesting, manufacturing, wholesaling and retail sales.  

A cannabis accountant understands the ramifications of all this scrutiny better than anyone. When you hire a trained and experienced cannabis accountant, they will spend a significant amount of time and energy making sure you’re compliant with all rules and regulations related to the financial side of your business. 

Because the rules for cannabis are so different and can be so punitive, accountants who specialize in cannabis must be proactive rather than reactive. We are not primarily problem solvers but problem avoiders. Our main mission is to help you organize and process your financial data in a way that will reassure the IRS that your accounting procedures are fully transparent and meet all legal requirements. 

Here’s an interesting fact. When an IRS auditor sees that you’re using compliant accounting processes and procedures and that your records are being kept according to the highest standards and practices, this will signal to them you’ve been tracking your financial inputs and outputs accurately and are compliant with all applicable regulations. They won’t even need to dig deeply into the records to know that your books are accurate since your responsible and professional approach to financial data management will prove you have nothing to hide. 

The Truth about Section 280E and Cannabis Tax Deductions

Under Section 280E of the Internal Revenue Service tax code, tax-paying entities are prohibited from deducting expenses incurred while engaging in the trafficking of controlled substances. Since cannabis is still classified as a Schedule I controlled substance by the federal government, cannabis entrepreneurs must observe the requirements of 280E, preventing them from enjoying certain tax benefits that operators of other legal businesses take for granted.

 “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 the trafficking in controlled substances” is how 280E reads. This is a serious obstacle that cannabis companies must deal with, which is why the sage advice of a cannabis accountant who understands the IRS’s Byzantine rules and regulations is so vital to the long-term health and security of these businesses. 

Fortunately, the situation with taxes is not as bad as it appears at first glance. While 280E prevents a long list of relatively standard business deductions, like overhead expenses related to advertising, wages and salaries, including travel expenses, cannabis companies are allowed to deduct the cost of their inventory from their gross receipts. They can also deduct some direct and some indirect costs associated with the purchase and production of inventory. This is an important distinction that a cannabis accountant can explain to their clients while helping them adopt tracking procedures for sales and expenses that will accurately document the cost of the goods they purchase so they can maximize the value of the deductions they are eligible to make.

Preparing for the Dreaded IRS Audit

When I take on a new client, I let them know that our first order of business is to prepare them to be audited. This focus on audits is necessary since this is what you’re always trying to avoid. 

When working with established businesses that already have a record-keeping system in place, I like to perform an IRC 280E compliance audit. I will perform a detailed analysis of their financial statements and accounting procedures, looking for IRC 280E violations that could trigger an auditor to investigate further. I create a 280E Compliance Scorecard, that identifies every red flag I uncover, so the client will know exactly what accounting procedures need to be implemented and why.

The results of these examinations are often an eye-opener for my clients, who had no idea they were making mistakes that could have cost them in the long run. As I implement the proper procedures, they will be able to rest easy knowing that they’ll be prepared to undergo the scrutiny of an IRS or financial statement audit with confidence. 

For cannabis startups, what is required is a comprehensive accounting system that makes sure the business is IRC 280E compliant before they open their doors. I created CannAccounting in a Box, a turnkey accounting solution that has policies and procedures that support full compliance with generally accepted accounting principles and IRS regulations. I create policies and procedures that are customized to meet the needs of each type of plant-touching operation, ensuring a trouble-free launch and full audit security. 

Whether you have an established dispensary, manufacturing facility or you grow cannabis, or are just starting out, you should be aware that the laws and regulations that govern the cannabis industry are constantly evolving. Cannabis accountants know this and stay abreast of these changes. Naturally, your cannabis accountant will help you adapt to the updated standards and implement the necessary procedures, to ensure you’ll experience no gaps in compliance.

The Cannabis Accountant is an All-Purpose Advisor  

In addition to providing basic accounting services and preparing you for audits, a cannabis accountant will help you address any and all issues that might arise relating to your finances and tax liabilities. 

For example, we can advise you on how to prepare for potential financial emergencies (this is the cannabis industry, they will happen). Cannabis accountants can help you find banks or credit unions in your state that will accept cannabis-related deposits and provide other banking services but also customize your financial record-keeping procedures to keep you out of trouble if you’re forced to deal only in cash. We can help you locate payroll experts, merchant services professionals, lawyers and any other service providers you need to keep your financial house in order. In addition to preparing you for your future interactions with the IRS, we can also collaborate with you to make sure you’re paying all the state taxes you owe.

Cannabis accountants also function as financial advisers who answer all your questions and even answer the ones you should be asking but haven’t. In the cannabis industry ignorance is as far from bliss as you can imagine, and we’ll make sure you’re always informed about any developments that could impact your business.

The services of a knowledgeable and well-prepared cannabis accountant are in essence a form of preventive medicine, and some of the best you can purchase. We can help you prime your financial immune system to be totally resistant to an IRS audit, and to any other challenges that might compromise your efforts to manage your finances according to the highest industry standards.