The global cannabis industry now generates $64 billion in revenue annually and is expected to reach $75 billion by 2029. Around two-thirds of this revenue comes from the United States alone. The demand for cannabis is growing – for both medicinal and recreational use. That’s why now is the best time for budding cannabis business owners.
However, new cannabis business owners still face obstacles. Legal and security concerns give dispensary owners headaches, but one obstacle can be even more intimidating: accounting.
Cannabis accounting has different steps and solves different problems than traditional business accounting. The cannabis industry is still relatively new and experiences unique accounting challenges.
It’s best to recognize these challenges early. Preparing for them, you can set your dispensary up for success as the cannabis market blooms. Here are 10 common accounting challenges cannabis business owners experience — and how a cannabis accountant can solve them.
Cannabis legalization is in a complex situation right now. While some states allow full recreational cannabis use, others are even strict about CBD usage. Getting a bank account for a cannabis business is difficult in many states.
Major banks are skeptical about opening accounts for cannabis businesses because marijuana remains federally illegal. State-wide banks may be willing to let you open an account if you’re in a state where cannabis is legal. Nationwide, it’s a challenge for dispensary owners to find financial institutions that will partner with them because of the perceived risks of this unique industry.
The 2021 Safe and Fair Enforcement (SAFE) Banking Act makes it easier for banks and dispensaries to team up, but many banks remain hesitant.
This also means you’re limited in financing options, such as business loans. Institutions willing to lend may charge you higher holding fees and interest or have stricter requirements for your business to qualify for a loan in the first place.
What are your solutions? Many cannabis businesses feel forced to only keep cash on hand. This makes bookkeeping more difficult and increases the risk of theft.
Explore your other options first. Instead of a federal bank account, opt for a local bank or a credit union. If you work with an industry-smart marijuana bookkeeper, they can help you find the best solutions to keep and grow your money.
Cannabis sales are taxed in 21 states. Through their taxes, cannabis businesses contribute to social and economic priorities like:
But complying with cannabis tax laws can be tricky. While federal taxation is being debated, marijuana is still a Schedule I drug. On the one hand, that limits the tax benefits dispensaries can expect from the IRS compared to other businesses. On the other hand, despite the Schedule I classification, dispensaries have to report and pay taxes on their income from cannabis sales. Cannabis businesses also need to pay employment taxes like other businesses.
Cannabis businesses have to navigate complex and changing regulations. Sometimes, authorities at the local, state and federal levels all take different stances. This can leave dispensary owners in a cloud of confusion. Marijuana accounting needs to stay in touch with all these evolving realities to help keep your business financially and legally secure.
The best solution is to seek help from a cannabis accountant. An accountant can help ensure your tax documents are accurate and your taxes are filed on time. They can also help you avoid tax penalties and audits.
As stated previously, federal cannabis taxation is still being debated. This means cannabis businesses are at higher risk of tax audits.
With the industry under close IRS observation, dispensary accounting has to be thorough and prevent the issues that lead to audits before they happen.
This is another reason why you need a cannabis accountant on your side. They know the common reasons cannabis businesses get audited and can save you from these filing errors.
If the IRS audits your business, whether in response to a filing error or not, having a marijuana accounting professional in your corner can make all the difference. An accountant can represent your dispensary when interacting with the IRS and ensure you have all the documentation you need to complete the audit successfully.
The marijuana industry is becoming more profitable. But profits can go up in smoke if you aren’t accurately tracking your sales. Proper bookkeeping is essential to understand your profits and losses.
Bookkeeping for dispensaries involves recording all transactions, including money you spend or receive in cash. Doing business in cash is common in the cannabis industry, especially for dispensaries that have met suspicion or resistance from banks. You have the right to trade in cash, but you must include these transactions in your books for tax purposes. If you receive over $10,000 in cash from a single sale or several related transactions, you must report this to the IRS within 15 days.
Tracking cash transactions along with all your other sales matters for more than legal compliance. You must understand the financial health of your business and make informed decisions. That said, it can feel overwhelming to keep track of everything in a way that supports compliance and smart money management.
Fortunately, a cannabis accountant can help you out. They will track your sales and business expenses, giving you peace of mind. They can also advise you on ways you can save your business money and which deductions your cannabis business can or cannot claim.
Your accountant isn’t the only finance professional your cannabis business will utilize. Any business needs a bookkeeper, payroll professionals, merchant processing and other professionals in this category.
While marijuana awareness is growing, many companies still turn the cold shoulder to the cannabis industry.
Good bookkeeping for dispensaries follows the same key principles as other industries. A professional cannabis bookkeeper will track and report all your income and expenses, including cash transactions. At the same time, the unique challenges of the cannabis industry mean you’re safest with a professional who knows the regulations and respects your business.
This is where a cannabis accountant will come in. If you have a need that falls outside their field, they can refer you to finance professionals who are willing to work with and even focus on marijuana businesses.
In this digital age, accounting and finance software helps your business save time and money. It allows you to input financial information, create financial documents and improve cash flow management.
Still don’t have time to keep up with your accounting? An accountant uses software to ensure your financial and tax information is accurate.
They can also help you implement additional financial software, such as an updated POS system, to optimize everyday tasks.
Seed-to-sale software that tracks the sourcing and distribution of your products may be a legal requirement in your state, so look for a POS solution that integrates with this software and your financial reporting and accounting software.
A professional marijuana accountant will be savvy in using the latest and best software and setting it up at the most affordable rate.
The first states to legalize marijuana have not seen long-term crime increases as a result. But marijuana businesses, especially dispensaries, are still vulnerable to criminals.
Many marijuana businesses go cash-only if they can’t find a bank, putting their finances at risk. Robbers sometimes steal marijuana products as well as their money. These crimes cut into current and future profits. That’s why it’s integral to protect your inventory and your finances.
To control cannabis crime, state and local authorities mandate security measures like:
There’s more to your dispensary’s financial security than these basic measures, though. A cannabis accountant can inform you about smart money and inventory protection strategies, especially if you’re a cash-only dispensary.
Business tax deductions can help reduce the taxes you pay. However, many cannabis businesses are limited in what they can deduct.
For example, the IRS restricts the business expenses a cannabis business can deduct compared to more conventional companies through IRS code Section 280E. As an exception to this code, you can deduct the costs of the goods you sell. Even claiming this deduction can get tricky for cannabis businesses, though, so enlisting professional help is worthwhile.
Fortunately, a cannabis accountant can inform you of the business tax deductions you’re eligible for and other ways to save on your taxes.
The cannabis industry has higher startup costs than normal. These can range from a few hundred thousand dollars to over a million, depending on your location. But these aren’t the only expenses dispensary owners need to cover.
Like any business, the cannabis business is vulnerable to unforeseen expenses, such as increased cost of goods, complying with new regulations, crime or even a lawsuit.
A cannabis accountant can guide you through saving and preparing for any financial emergencies. In addition, better cash management will improve your long-term profitability. Dispensaries can enjoy strong profit margins with smart money management. Get quality advice by choosing an accountant who knows the cannabis industry.
With the high costs of starting and running a dispensary, it can be tempting to welcome any investors on board with open arms. While these capital injections can help your business succeed, they can also lead to unexpected complications with the IRS.
Many investors want to be discreet, which makes sense given the social stigma around cannabis. However, silent investor relationships in this industry are vulnerable to pressures that undermine financial transparency and accurate reporting. While many investors have the best intentions, some parties in the black market may try to use investments to gain access to your dispensary for money laundering purposes.
An experienced cannabis accountant can help you understand the implications of investment offers and report any capital injections correctly to keep you and your business compliant.
Even though the cannabis industry is profitable, a lot goes into running a cannabis business. Bookkeeping for cannabis involves keeping track of expenses, regulations and challenges that differ from any other industry. This is one of the many reasons why many cannabis businesses face accounting problems.
Fortunately, the solution is simple. Seek help from a skilled cannabis accountant.
Polston Tax provides various cannabis accounting services, from general accounting and bookkeeping to tax preparation and audit representation. Schedule your free consultation today.
