Knowing what expenses your cannabis company can claim on your tax return can be overwhelming due to IRS Code 280E. Internal Revenue Code 280E states that businesses who engage in the sale of Schedule I or II controlled substances, like cannabis, cannot deduct business expenses from their taxable income. Meaning, unlike ordinary businesses, a cannabis business cannot deduct the following expenses:
Employee payroll and benefits
Rental and utility expenses
Advertising and marketing expenses
Repairs and maintenance expenses
Office administrative expenses
However, there is an exception that will help your business subject to the Code 280E provision. This exception allows for the deduction of costs of goods sold (COGS). For a cannabis business, the COGS involve costs associated with the production of products. That means costs for seeds, soil, and nutrients are deductible. Likewise, expenses related to cultivating and harvesting cannabis fall under COGS as well.
This is an important distinction to take note of. Many cannabis companies aren’t aware of these exceptions. Having a team of financial experts to point them out can save you big bucks on your IRS tax return.
Because of this provision, a cannabis business ends up paying taxes on their gross profit, which could create a significant tax burden. In fact, they often pay two to three times more taxes than an ordinary business. But, with expert accounting advice and proper compliance, you can minimize the effect of 280E on your taxes.
The following examples can help reduce your federal tax burden:
1. Separate Your Cannabis Business Activities
A business that is subject to 280E, can divide its business into two parts to help reduce taxes. The first business can be responsible for producing and distributing cannabis. This business would file a tax return with COGS as the only deduction.
The second business would perform business activities not subject to 280E. This way, you can take business deductions on your tax return, like payroll, rent, and marketing expenses. When combined, these two companies pay fewer taxes than a company operating as a single entity. This 280E strategy may sound complicated. But, partnering with a company like Northstar, can give you more insight into the nuanced rules and guidelines of Code 280E. And thus, it can help you save more money in the long run.
This 280E tax strategy is legal under the 2007 Californians Helping to Alleviate Medical Problems (CHAMP) federal court case. But, before you establish a second company, you must be able to state the business’ real purpose and revenue. Again, this is another time when consulting an expert is helpful. Otherwise, you might face the risks of tax penalties and violations (as was seen with Harborside).
2. Use Smart Corporate Structuring
Before determining the corporate structure for your cannabis business, consider the benefits and drawbacks of each entity option. Your three options include a C-Corporation, S-Corporation, and Limited Liability Corporation (LLC).
For a large scale cannabis business, legal advisers and CPA’s generally recommended setting the business up as a C-Corporation. Since a C-Corp is a tax-paying entity, the corporation itself pays taxes on the company’s gross profit and the business owner only pays taxes on salaries or dividends.
3. Track Employee Time by the Individual Activity
Certain hours worked by employees are deducted under COGS if those tasks relate to cannabis production. This means that accurately tracking time could make a big difference in your COGS number. To make this process easier, consider installing a time tracking system. It should allow the employee to record time by individual activity.
For instance, if an employee works as a budtender, their hours should be recorded under that activity. Employees involved in inventory, packaging, or cultivation would record their time as such. Accounted for correctly, time spent cultivating, packaging and in inventory management is deductible in COGS under Code 280E.
4. Be Prepared for a Possible Audit
As a cannabis business owner, your company is more likely to be audited because you’re selling a federally illegal (Schedule 1) substance. Hence, audit preparation is key. This is why staying organized, well-versed on tax laws and tracking employee hours is so important.
Also, did you know, Section 280E of the IRC requires your business to document all gross receipts and expenses? This includes revenue numbers for products sold in-store and online. It also includes cultivation expenses, marketing, seeding, inventory management, etc.
The IRS expects you to keep receipts for all transactions, to show as evidence on your tax return. Every bit of revenue and expense, no matter how small must be accounted for. Since 280E only permits the deduction of COGS, this number is often the most scrutinized by the IRS. If the deduction is incorrect, your business may be subject to a fine.
5. Work with an Experienced Cannabis Accountant
Section 280E applies to federal tax treatment for legal cannabis businesses, but that still leaves state taxes in question. State and local taxes vary depending on the state you operate in. This means it’s up to you or a reputable tax advisor to understand and adhere to state laws. This is just one more reason to work with an experienced cannabis accountant.
Expert accountants in the cannabis industry know the laws better than anyone else. They understand the ins and outs of Section 280E and how to correctly minimize your taxes. They can help ensure your tax return is filed accurately and has the proper supporting documentation. This kind of specialized service mitigates the likelihood of being audited and can ensure better cash-flow. Expert accountants can also offer expert advice on what’s allowable under COGS and what’s not.
For example, they know that businesses may deduct electrical bills for designated inventory spaces, but not for electricity used in sales spaces. And in some cases, the shipping costs related to the cannabis product can be deducted as well. Only experts have this information at hand.
Companies like Northstar Financial Consulting Group offer this expertise. They can provide your cannabis business with a full-service Accounting and CFO solution while helping to lower your 280E taxes. And they work diligently to ensure your tax return is correct.
Cost segregation is a proven tax planning strategy that the cannabis industry can use to cut down on their income tax liability. For decades, the IRS has challenged this strategy in tax courts, but it’s been upheld time and time again. Although cost segregation is permitted under IRC 280E, very few business owners know about it.
What is the Formal Definition of Cost Segregation?
As defined under the Internal Revenue Code 280E, cost segregation is, “the process of identifying personal property assets that are grouped with real property assets and then reallocating those personal property assets for federal tax reporting purposes.”
Simply stated, cost segregation is a method your cannabis company can apply to claim more deductions on your tax return.
How Does Cost Segregation Benefit Cannabis Companies?
To benefit from this tax savings tool, you need to identify your personal property assets that are currently classified as real estate property. They’ll then need to be re-allocated to personal tangible property.
Re-allocating your assets gives you the benefit of depreciating them faster because depreciation time for personal tangible assets could be five, seven or 15 years. And this is significantly faster than the depreciation time for real estate assets, which can be 20 to 39.5 years.
This tax planning strategy means you can maximize your depreciation deductions much sooner.
What Types of Costs Qualify for Cost Segregation?
Operating expenses that may qualify for cost segregation include:
Task-specific lighting costs, such as your grow lights
Costs paid to operate your electrical, plumbing and security systems
Specialty systems used for achieving climate control
Expenses incurred to run your hydroponic and irrigation systems
Many of the costs spent on the build-out and operation of your cannabis business qualify for savings under this tax strategy.
What Kind of Buildings Qualify?
If your commercial, rental, or lease-hold building meets the following criteria, it can qualify for cost segregation:
Your building is currently being used in the operation of your business
Your building was acquired
You built internal structures that serve as grow rooms or inventory rooms
You made updates and improvements to the building
The two most important points are: your building is in service and you’ve taken ownership of the building (as the purchaser, leaseholder, etc.)
What is the Largest Potential Tax Savings?
Cannabis companies who use cost segregation to reduce their taxes can write-off anywhere from 18 to 30 percent of their facility expenses. This can translate to hundreds of thousands of dollars saved during the early years of operation.
How Much can my Cannabis Company Save?
To get an estimate of your company’s potential tax savings, it’s advised to consult a team of accounting professionals and cannabis tax experts, like the ones from Northstar Financial Consulting Group. A qualified, outsourced CFO understands what is needed to execute a proper cost segregation study. And they know which supporting documents and evidence are required for the IRS.
Examples of items needed to conduct a compliant cost segregation study include:
The address of your building
The in-service date of your building
The purchase price, less land
Cost of improvements made (if any)
Service date of your improvements, which appear on your Fixed Asset Schedule (FAS)
Square footage of asset(s)
Federal marginal tax rate and more
Fortunately, a cost segregation study doesn’t require an accountant to prepare an amended tax return. When your accountant completes the study, they submit a form and the necessary documentation to the IRS. This form captures an accurate depreciation figure, so you can receive the benefit of this tax savings tool.
Cannabis companies go years without ever benefiting from these deductions. Plus, many accountants and tax preparers aren’t aware of cost segregation as a tax tool.
Cost segregation is a strategy that can save your company thousands of dollars while maintaining 280E compliance. So, take advantage of this money-saving strategy by contacting Northstar at (424) 274-3188 or firstname.lastname@example.org.
Curious to learn more about NJ weed laws in 2022? Northstar has you covered!
As New Jersey’s legal cannabis marketplace begins to take shape, some rules and regulations will apply. The state’s medicinal marijuana program is already in place and has oversight from the Cannabis Regulatory Commission (CRC NJ).
But what should we expect with recreational legalization in New Jersey?
Keep reading for CRC NJ insight, CREAMMA law NJ summarized, the NJ recreational weed timeline, and answers to some of the most frequently asked questions about NJ weed laws in 2022.
CRC NJ Insight
The New Jersey Cannabis Regulatory Commission has been tasked with overseeing the state’s legal cannabis space. This authority is directly involved in the licensing process for new cannabis operations. But it also handles recreational and medicinal marijuana use rules.
Business operators interested in getting involved in the Garden State’s legal weed industry will need to familiarize themselves with the CRC NJ website. The commission has put together a wealth of information for applicants, including detailed guides that facilitate compliance.
Through this law, the state regulates the cannabis industry. Employers’ responsibilities and employee rights related to cannabis use and how to regard it in a workplace setting. The law also lets microbusinesses operate in New Jersey and sets ownership requirements and restrictions.
NJ Recreational Weed Timeline
So, what’s the NJ recreational weed timeline? When will legal recreational cannabis businesses be able to set up shop in New Jersey?
At this point, the commission has already begun accepting recreational applications for cannabis growers, testing labs, and manufacturers. Most of the applications received so far have been for cultivation operations. While the commission had a deadline to meet on February 22, 2022, this deadline came and went without the establishment of a legal space.
The idea here is that the state wants to ensure that it’s setting its cannabis industry up for success. So, at this point, the governor claims that sales will begin within weeks, with these recreational sales beginning at existing medical marijuana dispensaries that obtain a license for adult-use distribution.
NJ Weed Laws FAQ
Can you go to jail for weed in New Jersey?
Even though marijuana is legal in NJ, it’s still possible to go to jail for weed in New Jersey. Punishments can become increasingly harsh with more products or intent to sell illegally, as well.
What is the age for weed in NJ?
NJ law allows adults 21 years of age or older to possess up to six ounces of marijuana legally. The law does not allow those under the age of 21 to have or consume cannabis.
Is weed legal in NJ now 2022?
Governor Phil Murphy signed legislation into law to legalize and regulate cannabis consumption and possession for adults 21 years of age or older.
Closing on NJ Weed Laws 2022
Looking ahead to 2022 and beyond, it’s evident that the cannabis industry in New Jersey is poised for success. With the Cannabis Regulatory Commission in place to oversee the industry and CREAMMA law NJ in effect, business operators need to familiarize themselves with the regulations.
Governor Phil Murphy has already announced that sales will begin within weeks, with existing medical marijuana dispensaries that receive a license to sell adult-use cannabis. So, it’s not too late to get involved in the Garden State’s legal weed industry!
Looking for assistance getting involved in NJ’s legal cannabis space? Northstar is ready to help!
Contact us now to learn how we’ll structure and scale your cannabis operation in the Garden State.
Whether you’re considering taking on cannabis clients or currently operating a cannabusinesses, you’re probably wondering what to be aware of bookkeeping for cannabis. This makes sense, especially when considering the fact that many common cannabis bookkeeping mistakes can result in costly infractions (or worse).
Cannabusinesses operate the same way as other legitimate operations; they need accurate numbers and reporting for their bookkeeping practices. However, the main thing that sets these operations apart from non-cannabis companies is the cash collected that increases changes or errors and fraud.
Keep reading to learn more about what to be aware of in bookkeeping for cannabis operations.
Own a cannabusiness and worried your bookkeeping practices aren’t up to par? Northstar is here to help!
Some of the most successful cannabis operations implement a series of checks and balances to minimize cannabis bookkeeping mistakes. This is the goal while bookkeeping for dispensaries as any errors can be detrimental to these businesses’ operations.
Here are some of the most common errors we see and how to avoid them:
Actual Cash-on-Hand Doesn’t Reconcile with Amount Scribed in Books
Sometimes, the cash on hand does not equal the amount the books have listed. This is common in cannabis and usually results from carelessness. But this is avoidable.
Avoiding this reconciliation issue involves performing regular cash counts. Dispensaries that make numerous activities weekly – sales, tax collection, distributor payments, and more – should be conducting cash counts every week.
To minimize the chance of discrepancies and maximize your chance of uncovering them as soon as possible, it’s best to have different schedules for on-site safes and on-site cash collection. If you can discover these problems fast, it’s usually easier to determine what happened to the missing cash and reconcile your books.
Point-of-Sale Receipts Don’t Match Sales Scribed Books
Most of the time, this is an indication of an absence of training. But this can be the result of human error, too.
Recording sales in the point-of-sale system generates a receipt that needs to be associated with the corresponding transaction in the books. In some cases, the person manning the register may have made a sale or given a refund and forgot to enter it in the system.
To avoid this error, make sure your employees are familiar with how transactions correspond to entries. Additionally, you can conduct daily cash receipt counts and run these against your point-of-sale system receipts.
Minimally speaking, you’ll need to run weekly or monthly reports to compare the point-of-sale receipts to the receipts listed in your books. But if you believe fraud is the problem, divide duties between two people. Have your cash collection handled by one person and put another in charge of reconciliation.
Your inventory management SOPs should include how to handle sales receipts. This is one of the most common cannabis bookkeeping errors we see in startups. But it’s also easy to resolve these issues with a series of checks and balances in place.
Inaccurate Accounts Receivable
Professional cannabis bookkeeping practices should always involve applying cash receipts to the right account receivable. However, sometimes, if the accounts receivable is inaccurate, this means this didn’t happen.
Another common issue is that the cash receipts were not applied to an account receivable.
To ensure you have applied all of the cash receipts to the right account receivable, all information provided to the bookkeeper should be clear with invoice numbers on payment receipts. For good measure, it’s best to conduct weekly reviews of receivables and collections.
Inaccurate Appropriation of Sales Tax
Sometimes, cannabis retailers don’t incorporate the right sales tax amount. However, the difference in tax is the cannabis dispensary’s responsibility, meaning this can be a costly error for the operator.
Cannabusiness operators should learn about and understand cannabis excise tax and the laws surrounding it. This is how they’ll know how much tax is necessary to include in product pricing.
On January 1, 2018, the sales and use tax applied by localities only apply to recreational marijuana.
If your books seem off, your payroll could be off. Owning a cannabis business means accurately handling payroll expenses and taxes properly.
For those finding their payroll report from your payroll processor and payroll ledger don’t match up, something is probably wrong. Team members may be inputting work hours twice or skipping days by mistake. But addressing this isn’t too challenging.
Checking the payroll processor can reveal the data. Then, it’s time to look over the hours each team member submitted. All payroll information should be the same as the accounting ledger.
If your checks and balances don’t prove fruitful, you may need a cannabis accounting firm to help. Northstar is ready when you are!
We’ll check your books, examine the issues, and provide solutions. Contact us now to speak with one of our experts to get your books organized.
Issues with Accounting for Medical Marijuanas & More
Cannabis accounting is similar to traditional businesses. However, this emerging industry tends to have more restrictions and regulations in place.
Some cannabis accounting issues are easy to spot. But some of the most common accounting problems in cannabis demand help from a cannabis CPA.
Here’s a list of some of the issues cannabusiness operators face:
Obtaining a Business Bank Account
Even with full legalization in some areas, federal legalization is essential for cannabusiness banking. Some states permit adult-use cannabis while others don’t even allow CBD consumption. Regardless of such, obtaining a business bank account for a cannabis business is challenging, but not impossible.
For those having trouble with getting a business bank account for their cannabusiness, keeping cash on hand is a way of life. However, other options exist. While federal bank accounts are difficult to get, some local banks or credit unions have options for cannabis businesses.
The major banks are still on the fence about opening bank accounts for cannabis businesses. Since marijuana isn’t federally legal, there’s a lot of liability associated with serving this industry. But state-wide banks will sometimes allow cannabis businesses access to bank accounts and banking services.
Changing Cannabis Tax Laws
States with legal cannabis have sales taxes. But while this helps the states accept this industry, cannabis tax laws tend to be rather complex.
Even with federal taxation an issue with 280E and marijuana’s federal classification, cannabis businesses are still scrutinized by the IRS. Thus, paying taxes is essential for those operating in the legal cannabis industry, even if it’s not federally legal at this point.
With this being the case, a cannabis CPA can help. At Northstar, our expert cannabis CPAs understand the industry’s needs and ensure all tax documents are properly recorded.
Lack of Audit Preparation
Federal cannabis taxation is still one of the hottest issues in the space. With this being the case, cannabis businesses experience an elevated risk of being audited by the IRS.
At Northstar, we make sure our clients are always audit-ready, just in case. We understand the common reasons for tax audits and help our clients minimize their chances of these filing-related issues.
Overlooking Crucial Tracking Practices
Tracking is essential for those operating in the cannabis space. And as these businesses become more profitable, it becomes even more necessary to track all sales. This is how these operations track profits and losses.
This is where Northstar can help.
We track all sales and business expenses, advising our clients on how they can save money and take advantage of all applicable deductions.
Challenging to Find Third-Party Cannabis CPA
General accountants are sometimes willing to delve into the cannabis space. However, it’s important to keep in mind that these professionals may not be well-versed in the industry’s nuances.
Cannabis businesses need someone to manage their bookkeeping, payroll, merchant processing, and more. But it can be challenging to find third-party cannabis CPAs as many professionals refuse to work with those operating in this space.
Besides providing financial services to the cannabis space, we also connect our clients with other professionals that specialize in helping cannabis businesses. These connections encourage our clients to thrive in the cannabis industry as they have access to all of the services they’d otherwise have difficulty finding.
No Accounting Software Incorporation in Operation
While we don’t recommend using accounting software without guidance from a professional, cannabis business accounting and finance software can help with tracking. This software gives business operators the ability to input and track all financial information, create crucial financial documentation, and improve cash flow management.
This accounting software cannot replace a cannabis CPA firm. However, paired with the Excel sheets we set up for our clients, we can handle the accounting aspects of cannabusinesses.
Lack of Finances & Cannabis Inventory Protection
Protection for capital and cannabis inventory is especially ideal in this industry. Even though cannabis legalization. decreases drug-related crime and violence prevalence, marijuana businesses are still at-risk. Particularly, dispensaries.
Since these businesses typically operate on a cash-only basis, they have a higher chance of being the victims of robberies and thefts. With this being the case, it’s essential to protect each operation’s finances and inventory.
We guide our clients to finance protection solutions and cannabis inventory control strategies. With these actions, cash-only cannabusinesses minimize their losses.
Difficulty Finding Cannabis Business Tax Deductions
The cannabis industry is not applicable for the same tax deductions as other spaces. Since the IRS placed limitations on cannabis business deductions, we must use the cost of goods sold to offset profits.
This is something we help our clients with because it ensures they obtain as many deductions as possible. Our services help these operations determine which deductions they’re eligible for and implement strategies to save on taxes.
Failure to Account for Unforeseen Expenses
Unforeseen expenses run rampant in the cannabis industry. Sometimes, startup expenses alone can run up to $750,000! However, other expenses are of concern, too.
Just like with traditional businesses, cannabis businesses run into many unexpected expenses. These can include repairs, drug recalls, product recalls, and more.
When our clients contact us about their concerns regarding unforeseen expenses, we suggest solutions to manage them as much as possible. We recommend working with cannabis insurance providers as these professionals safeguard against some of these problems. But having a cannabis CPA firm ready to help is another type of insurance!
Concluding on What to Be Aware of Bookkeeping for Cannabis
The cannabis space is growing rapidly. This growth attracts more legalization, which means an increase in cannabusinesses. However, this industry is difficult to navigate through.
While the emerging cannabis space requires cannabusinesses to hire CPAs that specialize in working within this industry, it’s also important for them to retain the services of a qualified cannabis CPA firm.
With these professionals, cannabusinesses can minimize the stress of keeping up with their accounting. This means they have more time to focus on their operations and prospering in this industry.
To learn more about our comprehensive suite of cannabis CPA services for cannabusinesses throughout the USA, contact us to speak with one of our experts. We’ll discuss cannabis bookkeeping solutions to fit your operation’s unique needs, ensuring your business is always audit-ready, just in case.
Despite the fact that the space is still maturing, the legal marijuana industry has captivated many high-profile cannabis angel investors. Several platforms focused on funding these operations have been on the rise, and as Silicon Valley founders focus their efforts on helping these operations obtain funding, we’ve seen an increase in the number of angel investors willing to take a chance on cannabis.
Even as the marijuana space continues its expansion, acquiring cannabis angel investor funding for cannabusiness startups and established cannacompanies isn’t the easiest task. However, the investors are there if you have a cannabis operation worth funding.
Keep reading to learn more about cannabis angel investors and what to expect on your journey to acquire funding.
What are Cannabis Angel Investors?
Cannabis angel investors are high net worth individuals who are willing to invest in the cannabis industry. These angel investors have access to capital and are well-connected within their network.
Generally, these investors fund cannabis projects that they believe will benefit society via social justice or scientific breakthroughs.
In the past, these angel investors focused on funding tech companies in Silicon Valley. Now, they’re putting their focus towards cannabusinesses and scientific breakthroughs in the cannabis space.
However, it’s important to note that some angel investors have a specific interest in medicinal marijuana projects while others invest solely in recreational weed projects.
Cannabis Angel Investors Vs Venture Capitalists
Although there are many similarities between cannabis angel investors and venture capitalists, there are some distinctions between the two.
For starters, not every cannabis angel investor will follow the path of a traditional venture capitalist. Just because these investors have funded tech startups in Silicon Valley doesn’t mean they’re willing to do it again for cannabis-related projects.
The reason why many startup founders struggle to find these angel investors is because they’re looking for a traditional venture capitalist rather than an angel investor.
In the same way that you would seek out a venture capitalist for your startup, you can also find cannabis angel investors who are willing to fund cannabusinesses as well as scientific breakthroughs in the space.
How do cannabis angel investors find dispensary investment opportunities?
Dispensary investment opportunities aren’t always so easy to find; sometimes, it takes actual legwork to find these opportunities.
It’s important to remember that the cannabis industry is still young, which means there are limited investment opportunities to choose from.
However, as more cannabusinesses continue to launch and states vote on whether or not recreational marijuana should be legal, we can expect a greater number of quality investment opportunities.
In order to find dispensary investment opportunities, cannabis angel investors may join industry networking events and attend cannabis conferences.
Here, they can meet with like-minded cannabusinesses looking for funding as well as other cannabis angel investors who are interested in funding comparable operations.
Are there hemp investors looking to invest in hemp grow operations?
Hemp investors are beginning to take notice of the potential for cannabusinesses that focus on both hemp and marijuana.
With growing support for the legalization of both hemp and cannabis, many investors are looking towards investing in these two cash crops as a means of diversifying their portfolios.
As with any industry, there will always be some risk involved. However, as more states vote on the legalization of both hemp and cannabis, those risks will decrease as time passes. Hemp and hemp products are actually now federally legal with the introduction of the 2018 Hemp Farm Bill.
In addition to diversifying their portfolios, many investors are looking at cannabis as a potential means of providing alternative medicine for consumers.
How to Find Cannabis Angel Investors
If you’re looking for funding to launch your cannabusiness or fund your cutting-edge scientific research in the cannabis space, finding cannabis angel investors should be one of your top priorities.
Networking events, conferences, and other forms of industry networking can help you find those investors.
While there are many benefits to networking within an already established industry, it’s important that you know many cannabis angel investors are seeking out cannabusinesses and projects that will benefit society via social justice or scientific breakthroughs rather than just profits.
It’s important to remember that not every cannabis angel investor will be interested in funding your cannabusiness or scientific breakthrough.
However, as more states continue to vote on the legalization of both hemp and marijuana, we can expect a greater number of quality investment opportunities that attract cannabis angel investors.
What do cannabis angel investors look for in a cannabusiness?
In order to attract the attention of cannabis angel investors, it’s important that your cannabusiness has strong leadership and a strong investor presentation.
In addition to providing information on your business plan and its goals, your presentation should also include projected values as well as what you believe will set it apart from the competition.
It’s also important that you understand what cannabis angel investors are looking for in cannabusiness startups and applicants. This will give you insight into who is the right angel investor for your pitch.
Like any industry, we can expect there to be some risk involved when it comes to investing in new ideas and startups. However, as more states continue to vote on legalization, those risks will decrease.
Cannabis angel investors are interested in cannabusinesses that have strong leadership teams with backgrounds in marketing, branding, finance, etc., have a market for their products or services, are passionate about the business they are trying to get off the ground, and have clear goals and objectives to get there.
If you meet these qualifications, you may be able to attract cannabis angel investors’ interest. But keep in mind, if you’re looking for an investment in your cannacompany, it’s best to do some research on the investors before pitching them. In some cases, while you might acquire the funding you need, you might not find the right investor for your company.
Benefits of Working with Cannabis Angel Investors
Working with cannabis angel investors isn’t always easy for cannabusinesses, especially when it comes to acquiring the funding needed. However, there are many benefits to working with cannabis angel investors in the process of starting your cannabusiness or in acquiring funding for expansion.
One of the key benefits that come to mind is that cannabis angel investors typically offer more money than banks and other lending institutions.
Another benefit is that these angel investors may offer the owners the freedom they need to run their business without too much interference. This can be very beneficial for cannabusinesses seeking funding for expansion because it gives them the ability to grow into new markets without having their growth curbed by outside forces that don’t have the company’s best interests in mind.
This can be especially important for cannabusinesses looking to enter new markets which are still viewed by some as less than reputable. For example, California cannabis businesses are finding it easier to expand into other states despite being on opposite ends of the legalization debate.
There are also tax benefits that cannabis angel investors can provide cannabusinesses beyond the ability to secure funding.
Also, keep in mind, if your angel investor has connections throughout the cannabis industry, this can be beneficial for your operation. For example, if your business makes edibles and the investor already has connections at dispensaries throughout the state, it may be as simple as making a few phone calls and sending a few emails to get your products into the dispensaries.
Downsides of Working with Marijuana Angel Investors
When it comes to working with these angel investors, there are particular benefits and risks associated with such partnerships. While some of the advantages may seem ideal for many cannabusinesses, be mindful of what you’re agreeing to before signing any contracts.
For example, cannabis angel investors may hold a certain percentage of equity in your business and want to be able to influence the decisions you make. However, if there’s a disagreement on how your cannabusiness should be run or what markets you should explore next, it could be the destruction of the working relationship between you and your investor.
Angel investors also typically have a lot of money that they’re willing to invest in your cannabusiness. However, this can lead to problems if you want to acquire additional funding from other investors in the future.
How to Make Your Business Attractive to Cannabis Angel Investors
Angel investors want to see that the cannabusinesses they are investing in will be strong enough to withstand future changes related to cannabis legalization. Keep this in mind when putting together your pitch for funding.
Also, it’s important not to underestimate what you’re asking of these investors. Even if you’re looking for a relatively small amount of money, having an informed plan for how that capital will be used can help you to secure the funding you need.
Angel investors are positioning themselves within the cannabis industry. Some may want to support start-up cannabusinesses while others are looking for established companies to invest in.
These investors are usually looking for cannabusinesses with an existing customer base or products that have already been tested on a limited scale.
Working together, cannabis angel investors can be an attractive alternative for many cannabusiness owners who are seeking funds outside of banks and traditional lending institutions. With this understanding, ganjapreneurs should first do their best to research any potential investor before asking them for money or giving up equity in their company.
4 Signs You Have Found Good Cannabis Angel Investors
Although cannabis angel investors come in all shapes and sizes, there are a few signs that you’ve found some high-net-worth individuals who want to help your cannabusiness grow. These are the four most important traits of an ideal investor:
1. They Know What You & Your Company Need
Angel investors are usually experienced business people with multiple successes under their belt. They also typically have the ability to spot cannabusinesses that could benefit from their involvement and financial support.
Naturally, they want to make sure you share this same vision for your cannabusiness. Your goal is to present yourself as an individual or company that can utilize its funds in a way that advances the goals of the investor.
2. They Want Your Cannabusiness to Thrive
Although some cannabis angel investors simply want to invest in your business because of the promise it holds for future returns, others may be looking at how you can improve upon an existing product or service within the industry.
In either case, it’s important that you’re able to clearly communicate what your cannabusiness can offer in return for the funding that’s being provided.
3. They’ve Made Similar Investments Before
Obviously, it’s beneficial when you’re working with an angel investor who has actively made investments in cannabusinesses similar to yours in the past. This familiarity with how you operate will help them to feel more secure about their decision to invest in your business.
4. They Trust You
Finally, many cannabis angel investors are looking for people or companies they can trust. As such, make sure that they have a clear understanding of where you stand on important issues and why they should consider partnering with you rather than another individual or company within the same industry.
In addition to establishing yourself as a trustworthy person, it’s important that you’re able to demonstrate a high level of professionalism as well as an understanding of how their money will be spent.
How Can Cannabis Angel Investors Help Your Business?
The best cannabis angel investors can provide cannabusinesses with a combination of funding, guidance, and industry connections. As such, there are several ways they can help your business in particular:
Angel investors can provide vital capital for cannabusinesses at the beginning stages. This initial injection of capital is often necessary in order to get these businesses off the ground. Once cannabusinesses are up and running, many angel investors will continue to support the companies they invest in by providing recurring funds or simply helping them grow via strategic advice.
Cannabis angel investors usually have a good deal of experience in the industry and know what it takes to get a cannabusiness up and running. They also understand the ins and outs of various business models which can help them to provide valuable advice regarding how your cannabusiness should grow over time.
Angel investors within the cannabis space typically have existing relationships with bankers, lawyers, and other cannabusiness professionals who are essential when it comes to helping these companies make important decisions when necessary. The right connections can also be extremely beneficial for opening up new markets when you’re ready to sell your product or service outside of your home state.
Tips to Maintain a Positive Relationship with Cannabis Angel Investors
You’ll always want to keep your cannabis angel investors apprised of the latest developments within your cannabusiness. As such, make sure to communicate regularly with them regarding important information which could affect their investment in you or your business.
This includes providing detailed financial reports on a regular basis as well as keeping them up-to-date on how you’re spending their money and what type of progress has been made toward long-term goals.
On top of this, it’s important that you’re able to provide your angel investors with an idea of when they can expect to see returns on their investments. Even if these returns aren’t immediate, having this information available will demonstrate your ability to run a successful business and be very likely to gain additional investments from these individuals in the future.
If you’re confident that your company will be able to establish long-term success within the cannabis industry, then it’s beneficial to find the right investors who share this vision. Then, it’s time to help them to see what type of impact they can have on your business throughout its lifecycle.
Angel investors typically don’t want a large amount of control over how you run your business. However, establishing a good relationship with them still requires good communication and transparency. This is how you’ll ensure both parties can be confident about their decision to partner up for the mutual benefit.
Closing on Cannabis Angel Investors
As you begin to seek out and develop relationships with cannabis angel investors, make sure that you’re realistic about what type of returns they can expect to get on their investments.
Many investors are happy to receive a portion of the profits made by the cannabusinesses they invest in. But others will prefer to remain silent partners who simply want to see these businesses succeed.
However, it’s important that the investors don’t feel like they’re getting ripped off or taken advantage of. If this is how they feel, it could result in them withdrawing from your operation.
If you’re looking for help preparing your company for an investment acquisition, contact us now to speak with one of our experts. We’re ready to organize your books and provide the right insights to ensure your operation appeals to investors.
The future in accounting for cannabis is looking good. However, at this point, the space isn’t completely clear. There are still many uncertainties plaguing cannabis companies, particularly in the accounting department, although this will soon change thanks to the work we’re doing at Northstar.
We’re pioneers in cannabis accounting, molding the future in accounting for cannabis with our fractional CFO model. Our clients can scale up or down as needed, giving them the freedom they need to ensure their operation runs smoothly during the busiest and leanest times of the year.
Looking for cannabis CPA services to scale your operation? Contact us now to speak with one of our experts about how we’ll grow your business.
Accounting for Cannabis in the Future
Accounting for cannabis in the future will likely be easier to find. While many CPA firms aren’t willing to work with the cannabis space, the subject matter will no longer be as taboo as the industry gains a firmer footing.
We’ve already seen some massive changes in the cannabis space that make it more appealing for accountants to jump into. But be wary of accountants and CPAs who lack experience working with cannabis businesses as errors can be costly.
Here are the reasons we believe accounting for cannabis in the future will be more widespread:
Cannabis Sales Rising
Cannabis use is on the rise, and with more people staying indoors because of the COVID-15 pandemic, we expect to see this trend continue.
Retail marijuana sales experienced significant increases in 2020 compared to 2019, and it’s projected that these sales will hit $37 billion by 2024. The U.S. even deemed cannabis an “essential” business during the pandemic, showcasing just how powerful the presence of this industry is becoming.
As more states and even countries legalize and decriminalize cannabis, it opens the doors for accountants to work with cannabis businesses in an advisory role.
Cannabis is no longer as taboo as it was in the past. Now that this industry has become more wide-spread accepted, we’ll continue to see more success in the space. With this profitability comes a need for cannabis CPAs.
Businesses Need Knowledgable Cannabis CPAs
Cannabis is one of the most complex industries in the U.S. The finances are connected to challenging requirements that go beyond what’s expected of non-cannabis businesses.
Tax laws like the IRS Tax IRC 280E make this industry difficult to work with for some. Accounting professionals must specialize in this field in order to maintain compliance with 280E while simultaneously maximizing the operation’s cost of goods sold (and tax deductions).
Appropriately accounting for cannabis businesses means organizing structures properly. This involves managing an additional layer of complexity that isn’t found in other industries. With this in mind, an experienced cannabis CPA firm brings knowledge that guides these operations.
Many Banks Refuse to Work With Cannabis
Since many banks are hesitating to work with cannabis operations, it’s a serious challenge to get the banking services other businesses can obtain. However, we expect cannabis to become legal at the federal level eventually, and when this happens, these operations will no longer need to keep significant amounts of cash on hand.
Until the future in accounting for cannabis comes to fruition, cannabis business owners need assistance with cash tracking. These operations are more prone to safety, theft, and fraud risks. But when we put proper cash management procedures and internal controls in place, we mitigate these risks.
Our services don’t stop at cash management and maintaining accurate records. We help cannabis businesses find compatible banks and obtain banking services, which helps these operations bypass one of the most common limitations experienced by those working in the cannabis space.
Cannabusinesses are Profitable
Looking at the cannabis sector as a whole, it’s becoming increasingly apparent just how profitable this industry can be. The American Cannabis Company claims that over 25 percent of dispensaries are generating more than $1 million in annual revenues. Another 15 percent report annual revenues that range from $500,000 to $1 million.
Cannabis is profitable, and since these operations’ revenues are on the rise, it only makes sense that this profitable niche sees a future in accounting for cannabis. More cannabis CPAs will be needed in the future. But they’re also needed now as the industry grows.
As cannabis sales continue to rise, the growth potential for cannabis CPA firms serving this industry is impressive. But this may tempt unqualified accountants to hop into the space.
Choosing financial professionals in the cannabis space can be tricky. Learn how to choose a qualified cannabis CFO.
Less Risk Involved Once Federal Legalization Passes
Once the federal government legalizes cannabis, the risks that are associated with accounting for the cannabis industry will dissipate. This means more accountants will want to become part of the space. But it also will cause the demand for these services to rise and those who are experienced in handling complicated financial issues within the industry will continue working with cannabusiness operators.
Equally important to keep in mind is that the future in accounting for cannabis may not be as challenging. But some things, like keeping accurate records and practicing good risk management, will still remain essential.
Fields of Interest for the Future in Accounting for Cannabis
The future in accounting for cannabis will continue to involve certain fields of interest. Some spaces will continue expanding at a more rapid rate, demanding more accountants to keep up with this swell in demand.
With the cannabis industry growing significantly over the next few years, accountants will see a lucrative future in accounting for cannabis. But it’s not limited to just financial professionals, who are required to have specific qualifications before they can practice their craft.
Here are a few niche services we believe will maintain and expand market hold for the future in accounting for cannabis:
The CBD space continues to grow, and CBD companies are profiting from this boom. But if they continue to try keeping their sales in cash form, it could lead to a host of problems for these businesses.
We want to bolster a future in accounting for cannabis, which is why we help these companies find banking relationships that will benefit both the stakeholders and the company without compromising customer security.
We’re also cannabis CPAs who are familiar with CBD products and the unique challenges that come with a newly legal marketplace.
As the demand for CBD products continues to rise, there will be more accountants who are eager to handle this space’s financial affairs. We want to take part in guiding these businesses as we’re molding the future in accounting for cannabis.
Reporting & Bookkeeping for Dispensaries
Dispensaries need reporting and bookkeeping services right now. But the future in accounting for cannabis will increase the demand for these financial services.
Accountants will need to be adept in working with financial institutions that no longer see cannabis businesses as a risk. This requires accountants who are up to date on current federal and state laws, effective tax planning strategies and the most recent banking practices.
We want to contribute to this future in accounting for cannabis by serving medical and recreational dispensary owners. Our reporting and bookkeeping for dispensaries help these operations maintain compliance while bypassing costly infractions and taking advantage of all potential write-offs.
Dispensary Chart of Accounts Organization
Dispensary chart of accounts organization will become increasingly important as more of these operations open. The way we generate this reporting helps these businesses grow, which is essential, especially when considering the current competitive nature of this space.
The competition is only going to increase, making this even more vital. This is why we believe that dispensary chart of accounts organization will play a significant role in the future in accounting for cannabis.
Cannabis dispensary operators already have a lot to track. Between remaining compliant with regulations, tracking KPIs, and remaining alert for security breaches, these operations are complex.
Proper dispensary chart of accounts organization offers the financial structuring these operations need. With a strong foundation for managing and tracking accounts, our dispensary operator clients find checking data and maintaining compliance easier, and will continue to do so in the future.
Other 420 Accounting Services
Other 420 accounting services we expect to see demand grow for include:
Cannabis Tax Planning
As the federal government contemplates how to tax this booming industry, as CPAs, we must remain diligent and keep our clients updated on how these changes may affect them.
Cannabis & Hemp Business Accounting
Cannabis and hemp business accounting is the bread and butter of accounting for cannabis. Generally speaking, this involves assisting growers and dispensaries with their financial reports. This is an area that will continue to see significant growth as more states legalize the use of cannabis and hemp for medical and/or recreational purposes.
Cannabis Controllership & CFO Services
As the cannabis space grows, we see the need for cannabis controllership and CFO services expand, too. This involves budgeting, cash-flow management, IRS tax code compliance, and monthly financial reporting.
Our clients receive the planning and data analyses they need to scale their operations. In turn, these services directly contribute to the cannabis sector’s expansion, which is why we expect to see a growing need for cannabis controllership and CFO services.
Closing on Future in Accounting for Cannabis
We’re looking forward to this future in accounting for cannabis as we continue working with our clients as cannabis CPAs. Our mission is to help our clients succeed, which contributes to the success of the cannabis industry as a whole.
With all that this industry offers, we’re sure to see a bright future for cannabis accounting as well.
At Northstar, we help dispensaries and other marijuana businesses with their financial reporting requirements and more. Our cannabis CPAs are ready to provide guidance based on the current state and federal laws regarding medical and recreational marijuana.
Contact us now to speak with one of our experts about how we’ll scale your business with financial services. We’re ready to help you expand your share of this budding space!