Reports reveal that the IRS is once again ramping up audits on cannabis businesses. After the lull during covid-19, the IRS is on a mission to ensure that cannabis businesses are adhering to the tax codes.
Unfortunately, cannabis companies are subject to more stringent taxation than other businesses and can claim fewer deductions. A lot of cannabis companies 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 can’t just hire any accountant. Instead, you need to look for an accountant with specialized 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.
Not sure what to look for when hiring an accountant? Keep reading this cannabis accountant guide to find out.
Look for an Accountant With Extensive Experience in Cannabis Verticals
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 make sure you hire a cannabis accountant who has worked with other companies in the industry and has in-depth knowledge of cannabis tax.
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.
Why Experience in the Cannabis Industry Is So Important
Section 280E effectively penalizes companies that deal in Schedule I drugs, even if they are entirely compliant on a state level. Section 280E of the tax code disallows “traffickers” of Schedule I or II substances to claim their business expenses as a deduction.
The only deduction these businesses are allowed is Cost of Goods Sold (COGS).
For instance, a company that cultivates cannabis would be able to claim for things like:
- Soil mixes
- Labor costs and salaries directly related to growing
These types of expenses all fall as Costs of Goods Sold. Unfortunately, there are many other expenses most businesses can claim for which cannabis companies can’t.
Some examples include:
- Marketing expenses
- Office overheads
- Vehicle expenses
- IT expenses
- Salaries and wages for sales staff
- Shipping or freight costs
- Licenses and permits
- Research and development
Expenses that don’t fall as Costs of Goods Sold can be substantial. Not being able to claim them as a deduction to your net profit for the year can significantly drive up 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. If you hire a general accountant, they won’t have nearly as much experience and cannabis-centric knowledge to draw on.
The end result? You might end up under-claiming, and be faced with a higher tax bill. Worst case scenario, an inexperienced accountant might not set your books up correctly. Resulting in wasted hours and money, and a scramble to set things straight come tax time.
Audits Are Almost a Guarantee
Reports state that roughly 1% of taxpayers get audited by the IRS
However, right now, if you’re a business in the cannabis industry you’re almost sure to get audited. A lot of cannabis businesses aren’t keeping up with the requirements of Section 280E. Thanks to this, IRS might audit you simply because you’re in the industry.
Currently, the IRS recovers up to 3x 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.
Make Sure They Have Active Cannabis Clients
You also want to make sure the accountant you pick has an active client base in the cannabis market.
Legal cannabis production is a very new industry, and laws and standards are constantly changing. It’s no good hiring an accountant who had one or two cannabis companies in their client base back in 2016.
Instead, you want to hire a team of cannabis accountants that work with cannabis companies on a daily basis. For best results, they should specialize in accounting services for cannabis clients.
If they do, they’ll be up-to-date on all the latest developments in the space, on both the regulatory and tax fronts.
Not sure where to find a company that specializes in accounting and tax planning services for cannabis companies? Here at Polston Tax Planning and Accounting, cannabis accounting services are one of our specialties.
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.
Verify Their Understanding of Cannabis Tax
To help you maximize your deductions and avoid issues with the IRS, the accountant you choose needs to have an in-depth understanding of cannabis tax.
Before you engage an accountant, it might be a good idea to ask them some questions around Section 280E. If they have quick, ready answers at their fingertips, this probably means they 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 be learning as they go when they take you on as a client.
If you want to learn more about Section 280E yourself, here is our extensive guide to cannabis tax.
A good accountant might still be able to provide you with great 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.
Check Their Qualifications
When choosing a cannabis accountant, you definitely don’t want to hire one that’s not professionally qualified.
The term accountant isn’t protected or regulated. In other words, anyone can call themselves an accountant.
Qualified accountants have to pass professional exams. After this, they can apply for membership with professional bodies. To be accepted, they will also need to demonstrate a certain level of experience.
Qualified accountants also need to engage in ongoing training and development.
Accounting firms are also required to ensure compliance with an extensive list of regulations in order to legally offer professional advice to their clients.
Unqualified accountants, on the other hand, aren’t subject to any of these requirements. They can undertake a couple of basic courses, call themselves an accountant, and start charging people for their services.
These types of “backyard” accountants can wreak a lot of havoc. If they give you bad tax planning advice, you won’t have any recourse. If the IRS finds you guilty of overstating expenses or under-reporting income, you’ll be the one left picking up the pieces.
Most accounting firms only employ professionally qualified accounts. If they don’t, this would jeopardize the compliance of the firm. Therefore, we’d recommend you opt for a team of cannabis accountants from a reputable firm, rather than an accountant that operates on their own or from home.
One way to check if you’re dealing with a large firm is to visit the about page and read any available bios and information on their tax teams.
Pick a Firm of Cannabis Accountants That Takes a Team Approach
While we’re on the topic of teams, this is another good reason to choose an accountancy firm rather than a lone operator. Accountancy firms like ours have teams of accountants and staff dedicated to optimizing every area of your record keeping and tax planning for success.
Instead of dealing with one accountant who gives your business a once-over each year, you’ll be in the hands of an integrated team. One that will work from all angles to ensure you’re maximizing your deductions.
Make Sure They Offer Internal Accounting Process Customization
Another thing to look for when choosing a cannabis accountant firm is whether they offer internal accounting process customization.
It doesn’t matter how good your accountant is. If your internal accounting processes aren’t tailored to your business needs, you’re going to be wasting time and money.
To ensure you don’t waste resources and time, our teams will set up your accounting system so it’s optimized to properly reflect the Cost of Goods Sold (COGS) according to IRS requirements and GAAP.
Our teams can also integrate your accounting software with any POS and Cannabis Tracking Systems. We will also fully customize your accounting process and documentation preparation.
Instead of being told by your accountant at the end of the tax year that your accounts aren’t set up in the right way, we make sure 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.
Ask About Business Entity Advice When Choosing a Cannabis Accountant
Another important 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 choose 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 that have a shared services agreement.
Under this configuration, you may be able to claim more expenses. This could help you lower your tax burden.
Look for an Accounting Firm That’s Invested in Your Success
Hiring an accountant for your cannabis business isn’t just a matter of finding someone to oversee your financials and tax. It’s about finding a firm that’s truly invested in your success. This is probably one of the most important cannabis accountant tips we can recommend.
If you can find a firm like this, you’ll be able to profit from CFO-level services. Instead of just getting your taxes filed, you can rest easy knowing that you’re getting the best tax and financial advice possible.
We know that your success is ours. Our accountant teams will leave no stone unturned when it comes to optimizing your financials and tax strategy.
For example, we even offer cannabis businesses guidance on facility layouts to lower tax exposure.
Choose a Team of Cannabis Accountants Who Can Help You Scale
Besides looking for an accounting firm that’s invested in your success, you should also make sure 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 that operates in more than one state. 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 up a branch or franchise in a state with new cannabis laws.
If you do this, however, you need to make sure 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.
Are You Looking for a Team of Cannabis Accountants Who Are Committed to Your Success?
If you run a cannabis business, you need to have an experienced account in your corner. One who’s up-to-date on changing regulations, and highly familiar with Section 280 of the IRS tax code.
They should have extensive experience working with cannabis companies. Most important of all, they should be committed to your success.
Are you looking for an accountancy firm you can rely on?
Here at Polston Tax Resolution and Accounting, we specialize in helping cannabis companies optimize their 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.