Looking for cannabiz accounting advice to expand your share of the legal cannabis industry? You’re not alone!
As the cannabis market matures, cannabusinesses are looking for ways to streamline their accounting processes, stay on top of changing regulations, and plan for the future. This is where our cannabis CPAs provide value.
In this article, we’ll touch upon some of the most common accounting issues these operations face and provide some cannabis industry-specific accounting advice for 2022 and beyond. You’ll also learn how we scale cannabis companies with data-driven insights.
Keep reading for the insight you need to grow your operation in this budding space.
Looking for a reliable cannabis CPA experienced in this growing industry? Northstar is ready to lead the way!
Contact us now to speak with one of our expert CPAs about how we can scale your cannabis company with the right financial services.
The Challenge for Cannabis Businesses
It’s all too common that businesses in this budding space receive breaking news from the local regulatory authority. Without the right accounting experts handling everything from calculating cost of goods sold (COGS) to setting up payroll, it can be difficult to stay compliant and keep these businesses afloat.
280E makes deductions complicated, which, in the case of such trade as cannabis, these operations can use all of the tax cuts they can get. The coronavirus pandemic has not made these businesses’ financial activities any easier, despite the fact that these companies were deemed “essential,” raking in millions in taxes for some states.
The cost of doing business in the cannabis space is limited access to banking, higher taxes for such trade than comparable operations in other industries, and a federal government that refuses to allow tax breaks for these companies. And let’s not forget about the ever-changing regulatory guidance from local and state authorities.
Love this post? Make sure to check out our other article about choosing the right cannabis accountant before you leave!
But Do Generalized Accountants Work for Cannabusinesses?
We strongly advise against working with accountants and other tax professionals who do not specialize in serving the cannabis industry. While these accountants may know the tax requirements to provide guidance for some operations, they usually lack the knowledge cannabis-focused accountants and CPAs have.
Simple GAAP guidance and general tax and banking knowledge is not enough to handle compliance liability; this is a big issue, and as many of our clients have experienced, it’s a challenge to account for all aspects of a scaled marijuana company come tax season.
General accountants and CPAs can work with the basics of accounting. But cannabis, at least in this country, is a more demanding field.
The formerly illegal drug is now allowed in most states. But it’s still illegal federally. This means paying taxes and remaining compliant is especially challenging, especially when operating a primarily – sometimes totally – cash business.
Constantly updating one’s knowledge about the industry’s ever-changing regulations is crucial for accountants interested in helping ganjapreneurs.
Whether a startup or large company employing hundreds (or thousands) of people, a fractional cannabis CFO or specialized firm full of expert accountants is vital to your organization.
Other Cannabis-Specific Accounting Issues to Consider
The Controlled Substances Act (CSA) still places cannabis in the same Schedule I classification it held since 1970, despite overwhelming public support for decriminalization. This is an obstacle to cannabusinesses looking for loans and bank accounts.
But it doesn’t stop them from growing their businesses. In fact, a majority of states have legalized medical marijuana, with many also allowing residents to grow their own cannabis for medicinal or recreational use.
Recreational marijuana has been legalized in nine states as well, leading some industry analysts to predict annual U.S. sales will reach $844.28 million by 2026.
That’s a pretty strong incentive for some cannabusinesses to bend the CSA rules. But it also creates challenges when it comes to bookkeeping and accounting.
For one, cannacompanies have to track two separate types of income – those from federally-legal activities and those from state-legal activities. They also have to keep careful track of expenses related to each type of income.
Then there are the ever-changing regulations to keep in mind. The U.S. Tax Code is constantly being updated, providing updates to cannabusinesses in ever-changing regulations. And this is just one example of how the underlying rules change often.
Let’s not forget about the product labeling requirements, which are more stringent than those for food labeling. Security is also a significant issue in the cannabis industry.
Moving Towards Legalization
Moves toward legalization have made the cannabis market quite lucrative for entrepreneurs in 2022 and beyond. But it’s also created a series of accounting challenges faced only by these operations, such as:
- Accounting for two types of income
- Keeping track of expenses related to each type of income
- Tracking costs and profits by state and federally legal activities
- Navigating ever-changing legislation at both the federal and state level
To address these challenges, cannabusinesses need a reliable cannabis CPA firm they can trust to provide sound advice on navigating these new waters. The process starts at the beginning of each endeavor, with proper structuring leading the way. But even with the best planning, surprises will undoubtedly arise.
That’s why it’s important to have a CPA who is up-to-date on the latest changes in the cannabis industry. This is how cannabusinesses stay compliant with all applicable regulations.
Accounting Tips Exclusively for the Cannabis Industry
The first step to scaling a cannabusiness is hiring the right accounting team. While it’s possible to handle all financial aspects during the initial phases of a startup, without the right tools and knowledge to grow the operation, it’s incredibly challenging to maintain compliance once the business begins to scale rapidly.
A cannabusiness may have made it through all of the early hurdles. But challenges will definitely arise down the road. This is why it’s so difficult for entrepreneurs to do this type of accounting by themselves. That’s where an experienced team steps in to provide reliable advice on how to get around any potential snafus.
The cannabis industry is unique and ever-changing. That’s why it’s important to have a team of experts who are familiar with the ins and outs of the business. This is the only way to ensure your company remains compliant and profitable in the years to come.
Here’s a list of some valuable insights only CPAs with experience in this space can provide:
Keep Track of Your Expenses
As a cannabis company, it’s important to keep track of your expenses. This is how you’ll stay compliant with all IRS regulations.
Make sure to track all of your business-related expenses, including rent, payroll, and advertising. This information will be vital while handling your taxes.
Even though the Controlled Substances Act makes it challenging – especially for cash-based cannabis operations – to write off expenses, a skilled cannabis CPA will know how to properly structure your operation to guarantee the least liability.
As mentioned earlier, cannabusinesses have to track two types of income – those from federally-legal activities and state-legal activities. Keeping these incomes separate is critical to staying compliant with the IRS.
It’s also important to remember that state-legal income is subject to both federal and state taxes. This can be a complex process, but an experienced cannabis CPA will have the know-how to make sure you’re paying all the necessary taxes.
Be Mindful of Inventory
Inventory is another area that needs to be closely monitored in order to stay compliant with IRS regulations. Security cameras, locks, sign-in sheets, and other cautionary measures are a must at this stage in the process.
There’s a challenge unique to cannabis entrepreneurs when it comes to inventory: what happens when you have a surplus of dried flower? Should you count the excess as inventory until the next crop is ready, or can you write that off immediately?
Inventory tracking is just one of the questions cannabis CPAs are equipped to answer.
Make sure to track the value of your inventory and its average cost per unit. This information will be valuable in calculating your profits and losses at the end of the year.
A cannabis CPA can help you develop a system for tracking inventory that will satisfy the requirements of the IRS. As regulations continue to change, they’ll also be equipped to adjust your system accordingly.
As companies grow, they tend to accumulate more inventory. But it’s important to remember that handling this excess inventory is a taxable event.
Keep It Legal
One of the best ways to remain compliant with IRS regulations is to keep it legal. There are a few different ways you can go about doing this.
For example, if your business is cash-based, you need to make sure that all of your income is properly reported and taxed. The same holds true for any expenses made on behalf of the company; they must be properly tracked and recorded as such.
This means double-entry bookkeeping is a must for cash-based operations. An experienced marijuana CPA will know how to tackle this process and any other necessary tasks on your behalf.
Be Mindful of Your Employees
That might sound counterintuitive, but it’s true. Employees come with their own set of challenges that should always be at the top of their minds.
While you want to make sure every employee is properly trained in security measures, you also need to make sure they’re not claiming more than their fair share on taxes. This means keeping track of all wages, deductions, and other necessary information.
You’ll also need to make sure employees are properly classified for tax purposes. The IRS has a very strict set of guidelines that determine how your workers should be classified – from employees to independent contractors to volunteers, there’s a list of requirements for each category.
It’s important not only to keep track of all of this information but to use it when filing your taxes. A marijuana CPA will know how to handle all of these special cases and can help you stay compliant with the government.
Stay Up-to-Date on Regulations
The cannabis industry is constantly changing, and it’s important to stay up-to-date on the latest state and local regulations and federal law. This can be a daunting task. But our team of marijuana subject matter expert CPAs is here to help you navigate the ever-changing landscape.
Local laws and regulations across state lines are essential considerations for every move our clients make. Regardless of whether it’s a cash business or has cannabis banking services in place, understanding the legal way to operate in this complex landscape can be the difference between a profitable taxable year and getting hit with costly infractions.
Our accounting, tax, and advisory services ensure our clients are compliant with all regulatory demands. We stay up to date on the taxes and bills our clients have, as well as the deductions we can use to minimize liability and maximize profitability.
When you’re ready to expand your business, we’re here to help with licensing acquisition and consulting. We’ll work with you to structure your organization in the most tax-efficient way possible to guarantee the deductions your organization may not obtain elsewhere.
Maintain Accurate Records for Tax Time
At the end of the year, it’s important to calculate your profits and losses in order to file accurate tax returns. This requires a thorough examination of all income and expenses throughout the entire year.
By keeping accurate records from the beginning, you’ll save time and money during tax filing season. An experienced marijuana CPA will help you do just that.
As the cannabis industry grows, it’s important to stay compliant with IRS regulations. This means keeping track of all income and expenses, as well as classifying employees correctly for tax purposes. An experienced marijuana CPA can help you with all of this and more.
Since the cannabis industry is still considered illegal by the federal government, cannabusinesses face a unique accounting challenge that could put them at risk for serious penalties if they fail to meet compliance standards. This includes paying taxes, which are higher than most other industries.
To help navigate these complexities, it’s important to work with a cannabis-experienced CPA who can provide sound advice on how to stay compliant with both state and federal regulations.
At Northstar, we understand the challenges of accounting for a cannabis business. We provide reliable and accurate services to help our clients keep their cannabis company operations compliant.
Incorporate Cloud-Based Software
Cloud-based software provides convenience and efficiency. But keep in mind, the available software is not robust enough to handle the full spectrum of a cannabis business’s compliance demands without input and organization from a cannabis financial professional.
This is why we recommend a multi-pronged solution for our clients. We combine software with excel sheets as part of our process to ensure our clients are well-organized and that all calculations are vetted by our subject matter experts.
The cannabis industry is constantly changing, especially when it comes to taxation and regulation.
Staying on top of local laws, as well as how they change across state lines, can make the difference between a profitable business year and costly infractions. Cloud-based software can offer some solutions to ganjapreneurs. But ultimately, an experienced cannabis accounting and tax professional is still needed to ensure full compliance with IRS regulations.
However, by using cloud-based software, a cannabis business can eliminate the time and resources required to maintain servers and IT professionals. Company employees will also appreciate immediate access to their pay information – no more waiting until payday!
The cloud also makes it easy to integrate with other programs your cannabis business may use, such as QuickBooks and payroll management software.
When it comes time to expand your operations, we’re here to help with licensing and consulting. We’ll work with you to structure your organization in the most tax-efficient way possible.
Northstar has extensive experience providing accurate and reliable bookkeeping and payroll services for cannabis companies. We provide our clients with the tools and expertise they need to stay compliant with federal and state regulations while saving time and money.
Make Sure Your CPA Already Successfully Works with Cannabis Clients
The CPA firm cannabis companies choose to work with should fully understand the nuances involved in accounting for the cannabis space.
While a whole bunch of CPAs may have experience working with companies in this industry, cannabis business owners need a firm with extensive experience working with clients involved in all aspects of the legal marijuana industry. This includes dispensaries, cultivation operations, edibles manufacturers, ancillary services, vaporizer companies, and more.
Simply put, you want someone who lives and breathes the cannabis industry. This person, or firm, should possess knowledge of the law and how it relates to cannabis and taxes, as well as local licensing rules and insight.
As more states legalize, accounting and tax services are becoming increasingly necessary. The cash business operations are making the transition from illegal to legitimate. And a CPA that understands the law and possesses knowledge about how to get banking services while scaling these companies with local tax laws in mind is invaluable.
Join the National Cannabis Industry Association (NCIA)
The National Cannabis Industry Association (NCIA) is the largest and most influential cannabis trade association in the United States.
What Does Membership Entail?
Membership in NCIA provides access to exclusive content, events, and resources like legislative analysis, market data, and best practices from successful cannabis companies.
As a business owner in the ganja space, it’s important to arm yourself with the best information and resources possible. Joining NCIA is a great way to do just that.
Upon becoming a part of the NCIA, cannabusiness operators have access to resources that can help them stay compliant with state and federal regulations. This includes an extensive library of cannabis-related legislation and case law, as well as quarterly updates on changes to regulations.
Cannabis industry professionals are also encouraged to partner with local and state lobbying efforts that affect their business. This, of course, includes those operating accounting and tax services for cannabusinesses.
Attend Networking Events & Conferences
More and more cannabis business expos and networking events are taking place throughout the United States. These are great for learning from other industry professionals, building relationships with potential clients or suppliers, finding new employees, and ensuring the company is current with industry changes.
Many events also include workshops and seminars from industry experts covering everything from growing techniques to the latest regulations. Some larger conferences even have accounting and tax planning professionals giving presentations on how cannacompanies can remain compliant with their state’s and federal-level laws while saving money.
Use Tech to Automate Processes, Reduce Costs, & Streamline Compliance Procedures
Technology can help reduce accounting and tax-related costs for cannabis companies. As touched upon before, cloud-based software, for example, can be used to automate processes and increase productivity.
This technology can also enhance company compliance procedures, removing human error from many tasks. And, as cannabusinesses become more established, they will likely need to devote more time to compliance-related tasks.
Technology can help reduce accounting and tax-related costs for cannabis companies. For instance, some tech can be used to automate processes and increase productivity within a company.
This technology can also enhance company compliance procedures, removing human error from many tasks. And, as cannabusinesses become more established, they will likely need to devote more time to compliance-related tasks.
Technology can help reduce accounting and tax-related costs for cannabis companies. For instance, some tech can be used to automate processes and increase productivity within a company.
High-quality surveillance systems provide documentary evidence of every cannabis product transaction happening within the facility. In turn, this provides needed protection should legal issues arise while fulfilling regulatory demands.
Sensitive areas within these businesses, such as grow facilities or processing labs where cannabis products are made, should be monitored and recorded 24/7.
One use case example would be a design and construction firm for the cannabis industry. This business model could implement a cloud-based construction management software to help them become more efficient and streamlined.
By incorporating this, it would save the operation time and money that would normally be wasted on paperwork while allowing them to focus on their projects.
What Else Should Cannabis Business Operators Know?
As cannabis CPAs ourselves, we speak with many new cannabis entrepreneurs breaking into the industry. These individuals have worked hard to obtain the right licenses, but when it comes down to running their operations, they need assistance.
Does a Business Plan Mean Success?
Having a written business plan doesn’t mean one has everything one needs to implement it. In the same way, it is possible to have a legitimate cannabis business at one point but not know how to run it without breaking laws.
This is where professional accounting and tax services can help immensely. We give our clients the knowledge and tools they need to ensure they succeed in their venture while complying with state and federal statutes related to the happy herb.
Cannabis business operators need services to keep their businesses running with compliance leading the way. This is the way to keep their money clean and emphasize
Northstar: Scaling Cannabis Businesses with Data
So, as you can see, there are many things to think about when starting or operating a cannabis-related business. But with the right team of professionals in your corner, the sky is the limit!
The cannabis industry is growing rapidly and with it the need for qualified accounting and tax professionals. As cannabis moves from the black market to the mainstream, businesses will require advisors who understand both the legal landscape and the complex financial issues associated with this new economy.
As the cannabis industry continues to develop, it’s important for business owners to work with a CPA that understands the complexities of laws and regulations specific to the cannabis industry. By doing so, they know their businesses are operating legally and in the most cost-effective way possible.
Quality Cannabis CPA Services from Northstar
Northstar provides the cannabis industry accounting services that ensure these businesses will thrive in 2022 and beyond. We simplify tax season and provide a streamlined approach using data-driven insights that help our clients make sound decisions for their businesses.
Our experience and expertise guide cannabis businesses through the complex accounting challenges in the cannabis industry. Contact us today to speak with one of our cannabis CPAs about how we’ll scale your cannabis company.
