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. 

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.