8 common accounting problems cannabis businesses face
This article is sponsored by the Henry Levy Group, an established CPA firm with extensive knowledge of the cannabis industry and a network of CPAs in almost every state that has legalized some form of cannabis.
So you’ve decided to run your own cannabis business. Congratulations! You’re on the forefront of historic progress, you’re helping patients in need, and you’re reshaping the global conversation about cannabis.
Unfortunately, your bold decision is not without its downsides. It goes without saying that running your own business can be difficult and stressful, but running a cannabis business is a whole ‘nother song and dance. Canna-preneurs are learning the hard way that building an industry largely from scratch that’s still federally illegal results in a lot of roadblocks, headaches, and legal frustrations.
One pain point in particular is accounting. Cannabis businesses run into a slew of accounting problems unique to this industry, including lack of banking services, one pesky Internal Revenue Code section, and being denied services from anti-cannabis vendors.
If it all seems intimidating and overwhelming, fear not: we’ve highlighted eight large problem areas for cannabis businesses that a knowledgeable accountant or CPA should watch out for and help you with if they arise. It may take a little hunting to find a suitable financial advisory firm that has experience working with cannabis businesses, but trust us, you’re much better off consulting with companies that understand your industry than with ones that are ignorant or opposed to cannabis.
Problem #1: Not Knowing About the Cannabis Industry, State Laws, and Tax Law
To help ensure your business is running smoothly (and legally), your lawyer and CPA need to be knowledgeable about the cannabis industry. It sounds simple, we know, but cannabis is still a largely new frontier, so the spread of education is still fairly narrow. A good legal and finance team should know what entities are permissible or normally used in this industry, and they must be familiar with the laws of your particular state. For example, some states require cannabis businesses to be run as non-profits or cooperatives, other states have no such requirement.
At a minimum, a knowledgeable CPA will understand the effect of Internal Revenue Code Section 280E, which concerns the taxation of illegal income (something the cannabis industry should be well familiar with due to the plant’s federal illegality), specifically what deductions are allowable. He or she will have suggestions on ways to minimize and/or protect you from the risk of major problems caused by IRC Section 280E.
Problem #2: The (Near) Impossibility of Getting a Bank Account
Despite the federal government giving its blessing to banks working with cannabis businesses, many financial institutions are reticent to allow legal cannabis businesses to use their services until the federal ban on cannabis is lifted. As a result, many cannabis businesses are forced to keep a lot of cash on hand, making them susceptible to robberies, safety concerns, and ugly audits.
Through some legwork and due diligence, a knowledgeable CPA can suggest some ways to successfully obtain a bank account, which, as lame as it sounds, is quite a milestone for a new cannabis business. He or she can also help with details like explaining the rules of depositing large volumes of cash that may exceed certain limits. Finally, and hopefully this may not be necessary, but in case you are unable to get a bank account, a knowledgeable CPA can train you to run your business using only cash and advise you on how to pay your bills and keep accurate records.
Problem #3: Not Keeping Track of Your Accounts
We get it, you’re not a big Numbers Guy (or Gal). As an entrepreneur, you’re not required to instantly know the ins and outs of running your own business. However, it’s crucial to keep track of the various accounts your business has for proper tax and reporting purposes, especially since your cannabis business has a stronger likelihood of raising red flags than a non-industry business.
A knowledgeable CPA should be able to suggest ways to set up a chart of accounts. Not only will good organization and impeccable bookkeeping be useful to your staff and management, they’ll also help with any IRS problems you may run into.
Problem #4: The Living Nightmare Also Known as Being Audited
Ugh, income tax audits. They join the top of the list alongside parking tickets, stubbed toes, and the series finale of “How I Met Your Mother” as Things Everyone Hates. Unfortunately, cannabis businesses are especially prone to auditing flags due to the nature of the industry, but don’t fret, a good CPA can help you weather the IRS storm.
If your CPA is familiar with the cannabis industry, he or she can give advice about potential audits from various taxing authorities. Additionally, your contact will know professionals (usually tax attorneys) who are also knowledgeable about defending businesses who are subject to audit.
Problem #5: Not Understanding Crucial Business Software
You’re running your own business now, so that means no more jotting important accounting information on the back of your stained take out receipt. Leap into the 21st century with a CPA who understands technology. By working online using cloud-based accounting software, you’re taking extra steps to secure your key financial and business information through virtual backups.
Your CPA should be able to walk you through other software used in this industry, primarily point-of-sale systems, and can tell you the pros and cons of various software that may further aid your business.
Problem #6: Not Being Familiar With Cannabis-Friendly Business Merchants
Though the cannabis industry has made exciting, history-making progress over the past few years, unfortunately there are still many companies that want nothing to do with a cannabis business, making the hunt to find cannabis-friendly business merchants a bit exhausting. Utilize your CPA to help direct your business to cannabis-friendly providers, including merchant processing, payroll, and insurance. The more knowledgeable your network is about your industry, the more secure your business is in ensuring it’s being run smoothly and legally.
Problem #7: Needing to Safeguard Your Inventory Assets
Let’s be real here: you have a lot of valuable (and federally illegal) inventory on hand, not to mention a lot of cash if your business is bankless. This double dose of green needs to be protected from thieves, embezzlement, accidents, and other unfortunate incidents. A CPA can advise your business on best internal control practices in order to safeguard your valuable inventory assets.
Problem #8: Not Knowing Any Relevant Business Consultants
For a lot of entrepreneurs, the road to success involves a lot of stumbles, and that rocky path is especially true for cannabis entrepreneurs. Knowledgeable business consultants can help guide you towards success if you’re struggling to figure out how to scale or grow your business.
Fortunately, after establishing a good working relationship with your CPA, he or she can potentially become a business consultant to you if s/he has enough clients in this industry and data that can be used to compare to your business. This guidance can be priceless as you find your footing in this new industry.
With enough time and experience, ultimately running a cannabis business won’t be any more of a headache than a non-industry business, but until that day comes, it’s crucial to invest in a knowledgeable accounting and legal team to help keep your business legal, organized, and successful. To all of the canna-preneurs out there working hard to legitimize a new and exciting industry, we congratulate you on taking a bold step towards the end of prohibition and a future of inclusivity, openness, and innovation. Good luck!