The Internal Revenue Service (IRS) is increasing audits on cannabis businesses — the agency is on a mission to ensure that cannabis businesses adhere to the tax code. Unfortunately, cannabis companies must comply with more strict tax laws than other businesses and can claim fewer deductions. Most business owners don’t realize this or aren’t able to meet the reporting responsibilities on their own.
If you own a business in the cannabis industry, it’s essential that you hire a good accountant. Cannabis accountants can help you maximize deductions and remain 100% compliant with the tax code. However, you must look for an accountant with experience in the cannabis industry— one who will partner with you to optimize your tax burden and set your business’s financials up for success. If you aren’t sure what to look for when hiring an accountant, this guide to cannabis accounting can help you find out.
Choosing the right accountant for your cannabis business has many benefits, including the following:
Generally, businesses can deduct ordinary and necessary expenses from their gross income. However, this provision does not apply to cannabis businesses. Section 280E of the Internal Revenue Code prevents businesses from deducting expenses from their gross income if they traffic Schedule I and II controlled substances. Cannabis is still classified as a Schedule I controlled substance under federal law, so cannabis companies cannot write off business expenses. The only deduction these businesses are allowed is Cost of Goods Sold (COGS), such as:
Unfortunately, there are many other expenses that cannabis businesses cannot claim. Some examples include:
Expenses that don’t fall as Costs of Goods Sold can be substantial. Being unable to claim them as a deduction to your net profit for the year can significantly increase your tax burden as a cannabis company. It also makes recording keeping and reporting complicated.
Hiring a specialized cannabis accountant is the best way to ensure you’re staying compliant and maximizing what you can claim. The cannabis industry can be complicated, so it’s crucial to partner with an accountant with experience and knowledge. They can help you claim the applicable deductions, reducing your tax liability.
Only a few taxpayers get audited by the IRS, but that number will likely include cannabis businesses. The challenge is that most companies in the industry are noncompliant with the Section 280E requirement, putting them at risk of penalties and other sanctions. For most taxpayers, there’s generally a less than 1% chance you will get audited. For Cannabis Businesses, however, you can expect that percentage to be much higher. Currently, the IRS annually recovers up to three times the dollars spent per hour on cannabis company audits than on non-cannabis company audits. Therefore, it makes financial sense for the IRS to hone in on cannabis-related entities.
Because there’s a high chance you’ll get audited, it’s essential that you have a cannabis accountant on your side who will make sure your tax returns are 100% compliant and error-free. The cannabis industry is highly regulated, with complex tax laws. Partnering with a professional can help you navigate these challenges and ensure your business stays compliant. Cannabis accountants can also represent you during audits and prepare the necessary documentation. They can gather and organize the financial records and provide explanations to auditors to ensure a smooth audit process.
Managing cash flow in the cannabis industry can be challenging, considering it’s predominantly cashed-based. To resolve this problem, you can hire a cannabis accountant to reconcile financial statements with sales. Experienced and knowledgeable accountants understand the unique cash management issues and can help you develop and implement practical solutions.
The top cannabis accounting firms leverage advanced technology to streamline processes. This approach is critical when you have a complex financial structure. Cannabis accounting software can manage your day-to-day financial transactions, maintain accurate records and ensure compliance with accounting standards and regulations. Ultimately, your business can reduce nondeductible expenses and increase cash flow.
You can leverage the financial insights you gain from effective accounting to grow your business. With a clear understanding of your financial situation, you can plan for expansion, assess investment opportunities and secure funding for growth initiatives. You can also evaluate the feasibility of new projects, evaluate risks and make informed decisions to drive growth.
Maintaining proper accounting standards can help you reduce financial risk and losses from regulatory breaches and lack of cash flow. Additionally, with a good understanding of your financial situation, you can proactively address potential risks and safeguard your stability and reputation.
Starting a business should be the most exciting time. It’s usually a different story for cannabis businesses. You have some many more regulations and bureaucratic hoops to jump through, it can be frustrating.
At this stage, you have a lot of critical business decisions to make that have long-term implications. For example, are you better off starting your business as an S-Corp or an LLC? How can you open a bank account, since banks are reluctant to deal with cannabis businesses? How do you know you’re setting aside enough money to pay taxes?
These are important questions that you need to know the answer to before you open your doors. It could be difficult to change or leave an expensive mess to clean up down the road.
Hiring an accountant that provides cannabis tax planning services now will help your business get off to a strong start because you have someone to help guide you in setting up your company the right way.
Cannabis companies present red flags for tax authorities. Many businesses operate on a cash basis, and the IRS and state department of revenue want to make sure that you’re paying your fair share. They also want to make sure that you’re not taking more than your fair share of deduction.
You should expect that your business will be audited at some point. Instead of showing up to an audit with your receipts in a shoebox, you should hire a small business accountant who can help you through the audit.
In an ideal situation, you worked with an accountant who works with cannabis businesses to prepare your taxes in question. They can make sure that your taxes are correct from the beginning. This will give you confidence that you’ll be able to get through the stress of a tax audit.
Let’s face it, tax laws for cannabis companies is a daunting maze that is hard to figure out. You have a choice in your business: you can become a lawyer and figure out the laws yourself or work with someone who already knows the laws.
Where many cannabis businesses are getting stuck revolves around section 280E of the IRS code. This section is crucial for cannabis businesses. For just about every business, you’re allowed to deduct business-related taxes, which can limit your tax liability.
Section 280E makes it illegal for companies that sell or distribute drugs that are classified as Schedule I or Schedule II to take business deductions. Some companies don’t have to be concerned with it, but if you have a dispensary, you can’t take deductions.
How does this impact you? You’re going to pay more in taxes. Even if you take deductions, the IRS says no, and you go to court over the issue, you’re likely to lose your case.
You’ll want to have an accountant who can advise you as to what you can deduct and what you can’t deduct. If you assume that you can deduct expenses that you really can’t, it can impact the overall profitability of your business.
Do you have employees or plan to have employees soon? You’re going to pay payroll taxes as a result. You want to make sure that your business is set up to pay those payroll taxes from the beginning.
Payroll taxes can be difficult to calculate. You can’t afford to make a mistake, especially since your taxes are already scrutinized so closely.
Your best bet will be to hire an accountant who can handle payroll from setup through payroll tax representation if you fall behind.
When you don’t know the tax laws for cannabis companies and you’re just trying to get by, it can be easy to get behind on your taxes.
Rather than bury your head in the sand hoping the problem will go away, you’ll want to hire an accountant. They can tell you what your options are to get back on your feet.
For example, you could get on an installment plan or file an offer in compromise. The sooner you take on the issue, the easier it will be to resolve it.
If you’ve made it this far without a small business accountant, congratulations. Should you have a thriving business and you’re ready to sell it, you’ll want an experienced accountant by your side.
An accountant will be able to help your business by putting your finances in order. You want to get the most value for your business, and your selling price will depend on the financials. If you can’t demonstrate that you have a profitable business, you’re unlikely to sell it for a decent price.
You must consider several factors when choosing a cannabis accountant for your business. Here are nine examples:
One of the first things to look for when hiring a cannabis accountant is experience. Cannabis is an evolving, complex industry. Because of the discrepancy between federal and state law, you want to hire a cannabis accountant who has worked with other companies in the industry and has in-depth knowledge of cannabis tax law.
Despite the evolution of state laws around cannabis, under federal law, cannabis is still classified as a Schedule I controlled substance. Thanks to this, companies that grow or sell cannabis are subject to Section 280E.
You want to ensure the accountant you pick has an active client base in the cannabis market. Accountants who work with cannabis companies daily are more likely to understand the industry and the tax requirements. Legal cannabis production is a very new industry, and the laws and standards are constantly changing. Thus, it would be best if you had a partner who is up-to-date on all the latest developments in the space on both the regulatory and tax fronts.
Accountants with active cannabis clients will likely have hands-on experience dealing with the financial nuances of the cannabis business. They can offer insights into best practices and strategies to help you navigate Section 280E bottlenecks. Additionally, it’s easier to assess the accountant’s track record since there are shareable experiences.
To help you maximize your deductions and avoid issues with the IRS, the accountant you choose must have an in-depth understanding of cannabis tax. Before engaging an accountant, it might be a good idea to ask them questions about Section 280E. If they have quick, ready answers at their fingertips, they probably have an active knowledge of how Section 280E affects cannabis companies and what tax planning strategies to implement.
If they can’t supply you with ready responses and only give vague answers or even brush off your questions, this might indicate that they haven’t worked with companies in the cannabis space before. If this is the case, they’ll learn as they go when they take you on as a client. If you want to learn more about Section 280E, check out our extensive guide to cannabis tax.
A good accountant might still be able to provide you with excellent service, but most cannabis companies would prefer not to be guinea pigs. Getting into hot water with the IRS is nobody’s idea of fun and an inexperienced or unqualified accountant could cause you unforeseen tax compliance issues down the line.
When choosing a cannabis accountant, you don’t want to hire someone who is not professionally qualified. Qualified accountants have to pass professional exams. After this, they can apply for membership with professional bodies. To be accepted, they must also demonstrate a certain level of experience.
Qualified accountants also need to engage in ongoing training and development. Accounting firms must also ensure compliance with an extensive list of regulations to legally offer professional advice to their clients. Unqualified accountants, on the other hand, aren’t subject to any of these requirements.
Qualified accountants will be well-versed in tax regulations and can help you navigate the complex landscape. Choosing an accounting firm is even better since these firms usually employ multiple qualified professionals with various backgrounds. Most accounting firms share their qualifications on their website, so they’re easy to find. The state accountancy board that issued the certification can also provide valuable information, but it would be easier to ask the accountant to share their certification.
This tip generally applies to accounting firms with diverse teams and resources rather than a lone operator. Accountancy firms usually have teams of accountants and staff dedicated to optimizing every area of your record keeping and tax planning for success. This can be particularly advantageous in the cannabis industry, where specialized knowledge of tax regulations, compliance and financial management is crucial.
Well-structured cannabis accounting firms can work from all angles to ensure you’re maximizing your deductions. They often have different team members with unique perspectives and insights, leading to more comprehensive and effective strategies for your business. Your business benefits from the collective knowledge and support of a team of top professionals providing practical solutions.
Another thing to consider when choosing a cannabis accountant firm is whether they offer internal accounting process customization. It doesn’t matter how good your accountant is. You will waste time and money if your internal accounting processes aren’t tailored to your business needs.
For example, to ensure you don’t waste resources and time, the team at Polston Tax sets up your accounting system so it’s optimized to reflect the COGS according to IRS requirements properly and generally accepted accounting principles (GAAP). Our teams can integrate your accounting software with any point-of-sale (POS) and Cannabis Tracking Systems and fully customize your accounting process and documentation preparation.
The team ensures that your system is customized and streamlined from the get-go. This can save you hours of headache trying to re-categorize transactions and re-structure your books after the fact.
Another vital service all cannabis accounts should offer is entity formation advice. Before starting any kind of business, it’s always a good idea to invest some time into choosing the most advantageous entity type. Because cannabis businesses are subject to Section 280E, it’s even more important to select the right entity type. Expert advice on business entities for cannabis companies could save you thousands of dollars in taxes.
For instance, depending on the nature of your business, an experienced cannabis accountant might advise you to split your business into two entities with a shared services agreement. Under this configuration, you may be able to claim more expenses. This could help you lower your tax burden.
Hiring an accountant for your cannabis business isn’t just finding someone to oversee your financials and taxes. It’s about finding a firm that’s genuinely invested in your success. This is probably one of the most crucial cannabis accountant tips we can recommend. If you can find a firm like this, you can profit from CFO-level services. Instead of just filing your taxes, you can rest easy knowing you’re getting the best tax and financial advice possible.
At Polston Tax, we know that your success is ours. Our accountant teams will leave no stone unturned when optimizing your financials and tax strategy. For example, we even offer cannabis businesses guidance on facility layouts to lower tax exposure.
Besides looking for an accounting firm invested in your success, you should also ensure they can help you scale. No matter how large your accounting needs become, you want to know that your accounting firm can handle them. You might also want to pick a firm operating in multiple states. For instance, let’s say you want to open a dispensary franchise in multiple states.
As time goes on, new states are passing legislation to legalize cannabis. An existing cannabis business could be perfectly positioned to open a branch or franchise in a state with new cannabis laws. If you do this, however, you must ensure that your accountancy firm can offer state-specific advice. No matter which states you expand to, you want to know that you can rely on your accountancy firm.
Below are answers to some common questions:
Cannabis accountants use their experience and knowledge of cannabis tax law to prepare financial documents such as profit and loss statements and balance sheets. Some can also audit books, prepare reports for tax purposes and simplify any financial complexities. They can provide guidance during audits. Top cannabis accounting firms can help reduce your nondeductible expenses and maximize your deductions, taking into account the requirements for Section 280E of the tax code.
Yes, cannabis accountants are essential regardless of the size of your business. They can ensure you pay your taxes promptly, keeping your business running smoothly. Qualified accounts with knowledge of cannabis tax laws can identify and claim tax deductibles, reducing your tax liability and saving you money.
Cannabis accounting firms can help small business owners comply with financial rules and cannabis tax regulations. They can clarify financial statements, manage payment processes and file tax returns correctly. It’s essential to assess your business needs and choose a professional who can bring the most value to your operations.
First, verify the accountant’s professional qualifications. Check if they have active cannabis clients and examine their track record. Finally, test their knowledge of cannabis tax laws.
Not sure where to find a firm with experience in accounting and tax planning services for cannabis companies? At Polston Tax Planning and Accounting, cannabis accounting services are one of our practice areas. Our teams of cannabis accountants have over 100 years of combined experience in small business accounting and tax resolution. We have been working alongside companies in the cannabis industry since the legal cannabis market came into being. Because of this, our accountants have in-depth, hands-on knowledge of cannabis tax.
Our professionals are up-to-date on changing regulations and highly familiar with Section 280E of the IRS tax code. We have extensive experience working with cannabis companies and leverage cannabis accounting software to optimize tax planning. Our teams of cannabis accountants handle everything, from setting up your accounting software to dealing with the IRS. Contact us today for a free consultation!
