Accounting for cannabis companies is becoming more and more necessary with each passing day. As legalization takes hold throughout the country, earnings are on the rise for cannabis companies.
As these companies grow, so does their need for financial professionals to give them direction.
Accounting is an essential part of managing any business, especially one with changing laws and new tax implications. It’s important to have a firm grasp of what changes are happening within the industry as well as how this impacts their clients.
In this post, we cover accounting for cannabis companies, how it differs across the space, and some of the top questions related to the topic. Let’s get started.
420 Accounting Services
420 accounting services manage the accounting needs of operating cannabis companies. Services included in this niche are the same as others; bookkeeping, accounting, payroll, tax planning, and other financial services.
The main difference between 420 accounting services and accounting for companies operating in other industries is the slough of complications that can arise while accounting for cannabis companies. One wrong move can be devastating for these operations, and without an experienced CPA holding onto the reigns, it’s quite easy to suffer unnecessarily from an avoidable issue.
With this in mind, let’s dive into some of the concerns you’ll face when accounting for cannabis companies.
What Is a Cash Basis Accounting Method?
Cash basis accounting is simply an accounting method that counts revenue when money comes in and expenses when they are disbursed. This means that a company’s books will tally income and expenses when cash from the transaction is received or paid out.
As you can imagine, there are a lot of complications that arise when counting expenses in this manner, especially when dealing with cannabis companies. Because cannabis remains federally illegal, banks remain wary of opening up accounts for these businesses due to concerns over legal ramifications.
Without an account, it is difficult to keep up with expenses and this can lead to major issues. Perhaps the most notable problem is that it’s difficult to pay taxes on time when one doesn’t have an account.
This means that companies operating in the cannabis space need to take extra steps when accounting for their expenses. And since they are often forced to operate through cash due to these legal concerns, they need to take even more precautions than other businesses.
Loving this post? Make sure to check out our other article about the future in accounting for cannabis before you go!
Accounting for Cannabis Companies: The Extra Steps
Cash basis accounting means that it’s difficult to keep track of expenses and this can be a major issue for cannabis companies. As such, there are extra steps one must take when accounting for this niche.
The first and most important is to make sure that you have a solid accounting team. There’s no way around it: you’ll need to have experts working hard to ensure your compliance and guarantee your operation scales effectively.
Secondly, your CPA needs to be aware of all current laws regarding cannabis. This is especially important if you’re working in a state where cannabis has not yet been legalized. This way, your CPA can help you navigate the extra steps that need to be taken when dealing with these laws.
Your CPA should also have an understanding of how this industry operates. Given the increased scrutiny on cannabis operations, it’s important for a business owner who is looking to scale in the space to have a CPA that understands the ways in which these companies operate. This will ensure a more streamlined accounting process.
CBD Accounting vs Cultivation Accounting
CBD accounting is a subset of the larger cannabis space. In this niche, you’ll find businesses that focus solely on CBD-related operations; from CBD oil production and product manufacturing to retail sales, this niche is growing rapidly. And so is the need for CBD accountants.
Given the increased demand for CBD in recent years, companies have been popping up left and right to meet these high consumer demands. As such, there has been a large boom in CBD oil production over the past few years.
As CBD gets more mainstream attention, companies are scrambling for experts who can help them take advantage of the opportunities that lie before them.
With this in mind, it’s becoming even more important for a business owner looking to expand their operation into the CBD oil niche to have a CPA that specializes in CBD accounting.
Beyond their specialization, CBD accountants need to be well-versed in the types of expenses that come with producing CBD oil. Accounting for cannabis companies can be difficult and this is even more so the case when taking strict regulations into account.
Because of these rules, it’s important for a company looking for CBD oil producers to hire an accountant who can help guide them through the process.
Cultivation accounting involves a whole different set of expenses. These costs are related to the entire cultivation process from beginning to end.
In other words, this involves both the expenses related to harvesting, trimming, and curing, as well as those associated with packaging and shipping. Furthermore, it also includes things like grow equipment costs and security expenses.
The unique challenges that cannabis companies face when accounting for these types of costs should be a major consideration when looking for a CPA.
Given these challenges, it’s important that companies working in this space have a well-versed accounting firm that understands the process from beginning to end. An accountant who specializes in cultivation accounting will be vitally important when dealing with these considerations.
Accounting for Cannabis Companies FAQ
What is a cannabis CPA?
Cannabis CPAs are expert accountants who specialize in helping cannabis companies navigate the legal requirements and financial constraints one faces when operating a business within this niche.
What qualifications should I look for when hiring a CPA?
For CBD oil producers, it’s important to hire an accountant who specializes in CBD accounting, just as growers should bring someone in who understands the niche. In essence, they’ll need to be well-versed in the latest legalities surrounding these unique spaces.
What are some common pitfalls observed in the industry?
One of the biggest problems with navigating cannabis accounting is inconsistency. Given that these companies operate in areas where it’s still not legal, there is still a lot of ambiguity regarding how businesses should be operating. This leads to issues when it comes to things like tracking inventory and quality control.
Do dispensaries pay federal taxes?
Yes, dispensaries must pay federal taxes. The money earned in these operations is all income and taxable, meaning it will need to be included on your tax return. But since cannabis is still seen as a Schedule 1 controlled substance, Section 280E limitations make it more challenging for these operations to obtain write-offs.
Concluding on Accounting for Cannabis Companies
As the cannabis industry enters yet another year of growth, it’s important for companies to streamline operations in order to get ahead.
One thing that all operations should keep in mind is the importance of having an expert CPA on their team who can help them navigate these unique challenges. By doing so, companies will be able to expand more efficiently and effectively.
At the end of the day, a CPA will provide you with the support that can help your business succeed in this ever-changing environment.
Looking for expert accounting for cannabis companies? Northstar is ready to help!
We understand the nuances involved in accounting for cannabis companies, regardless of at which stage they are in development. Contact us now to learn how we’ll use our accounting expertise to scale your operation.