Operating a cannabis dispensary? Thinking about dipping your toes in the cannabis industry as a dispensary owner?
In this post, we cover everything you should know about operating a successful cannabis dispensary from a financial perspective.
Looking for expert assistance managing your legal cannabis business’s financials? Northstar is ready to increase your dispensary’s profitability!
Contact us now to learn more about how we’ll enhance your weed profits with the right financial services.
What is the Average Dispensary Profit Margin?
Whether you’re operating in medical or recreational marijuana, your average profit margin is important. Besides the cost of opening a dispensary, other expenses exist – and these will impact your profit margin.
Medical and recreational marijuana cannabis dispensaries usually operate with an average net profit margin between 15 and 21 percent after accounting for taxes. However, equally important to note is that this percentage varies in accordance with state or provincial regulations.
The cannabis dispensaries distributing medical marijuana and recreational cannabis usually have the best net profit margin. However, creative recreational dispensaries can dominate the dispensary space, too.
After your initial investment to open your doors, you’re ready to operate. But ongoing expenses can affect profitability.
Here’s a list of the expenses likely to affect your operating profit margin:
Cannabis Real Estate
Besides the initial licensing fees for cannabis businesses, dispensaries should expect to spend at least $100,000 annually in rent. But if you find real estate for cannabis that requires renovations, this could increase the initial cost to $50,000 or more.
However, if the cannabis dispensaries locations are purchased outright, dispensary owners mainly have to worry about property taxes impacting their net profit margin. For additional insight, make sure to check out our post on buying commercial cannabis property.
Cannabis Industry Banking Fees
Part of your estimated annual revenue will go towards banking fees. It costs money to have your own growing business, but the cost of banking is higher in this grey-area space.
Since cannabis is still technically federally illegal in the US, many banks still refuse to work with dispensaries. However, it’s still possible to work with credit unions and private marijuana banks in some regions. Even with this being the case, some of these organizations will charge holding fees as high as $2,000 per month.
Cannabis businesses need electronics to operate successfully. Each square foot of space could be holding thousands or even tens of thousands of dollars worth of inventory. So, you’ll need a security system and a fully compliant POS system to manage your inventory.
Advertising budgets in cannabis vary, of course. But, depending on your location, you may need to invest more than a quarter of your annual revenues in an advertising budget to compete.
Attorney on Retainer
While a dispensary makes money, these earnings don’t always come without risk. This is why it’s a good idea to have an attorney on retainer.
Dispensaries are especially vulnerable to lawsuits. Thus, having an attorney ready for a worst-case scenario situation is always ideal in this space. This could cost up to $50,000 annually.
Even a smaller dispensary serving the adult market will need a team to operate successfully. Depending on the size of your cannabis operation, your annual payroll could be $250,000 or more!
How Much Does a Dispensary Owner Make?
How much a dispensary owner makes depends on several variables. For example, medicinal weed sales might earn more in one cannabis market than it does in another. However, in some spaces, medical marijuana might not be as popular as adult use.
Furthermore, your cannabis business might grow its own marijuana indoors. This would minimize your inventory cost while allocating some of your operating income towards elevated utility costs.
The money dispensaries or cannabis retailers spend on inventory varies. Some might spend more to supply stores with special medical-grade strains while others need to focus on stocking other cannabis products like extracts or edibles.
Operating dispensaries isn’t an exact science. But you can learn a lot from your sales data and use this to increase your annual revenue and average profit margins.
But how much money should you expect as a dispensary operator? If your business generates over $5 million annually, you could expect to pay yourself an annual salary of $500,000+.
How Much Does a Dispensary Make in Sales?
Dispensary sales are much like coffee shops; annual sales depend on several factors.
Think about the market competition. Dispensaries focusing on patient access to marijuana can run a profitable company. But they miss the adult-use market.
However, entrepreneurs interested in operating a dispensary in the recreational marijuana space will need a strong marketing campaign to acquire customers. Medical dispensary businesses will also need marketing, but the operation can become profitable based solely on word of mouth if they’re in the right location.
If a location is saturated, running a profitable marijuana business becomes more difficult. Business opportunities become more profitable with less competition, and this holds true in cannabis, too.
Tips for Maximizing Dispensary Profit Margins
Find Your Break-Even Point
Use the break-even formula to determine your break-even point. This is the point at which marijuana dispensaries break even, meaning this is the minimum dispensaries must earn to continue operating.
Check each month’s revenue receipts to determine whether you’re within the threshold of breaking even. Marijuana dispensaries are notorious for having high inventory costs. But if you’re selling enough product to cover all costs and then some, your cannabis supply store could be running at a profit.
Research Your Competition
Marijuana prices have been dropping throughout the US. As more competition enters the space, more marijuana is available, and this drives the price down.
Look at your competition. They likely use professional packaging, sales, and digital marketing to increase their market share. See what you can do and how you can improve upon what your competition is doing.
Improve Your Product Offerings
Whether you operate a recreational cannabis supply store or a dispensary focused on medical marijuana, you’ll need to offer more than just cannabis.
You might even go the extra mile for your customers by offering their favorite infused snacks or drinks. You can win over customers by analyzing what the market demands.
For example, your average supermarket might notice that more customers are looking for organic items. To compete with the local Whole Foods Store, it might begin offering more organic options.
For a dispensary, you might notice that more people are looking for quality concentrates. If this is the case, sourcing these products from top producers could be a good idea. While you might need to charge a premium, you could maximize your profit margins by offering products no one else is offering.
The same goes for impressive flower strains, edibles, and other product offerings.
Doing promotions on a limited-time basis is a good way to increase dispensary sales. And if it’s something you can purchase in bulk at a great price, you could increase your profit margins tremendously with the right promotion.
For example, you can run a promotion offering a first-time discount on concentrates on first visits. You could even try implementing a loyalty program that offers customers high-quantity discounts for purchasing regularly from your dispensary.
You might also consider providing a daily deal. You could offer 50% off a single item or a free gram with a purchase of an ounce.
Streamline Your Operations
One of the simplest most direct ways to optimize a dispensary’s profitability is to make it more efficient. Identify your operation’s daily functions and look for ways to reduce costs. With the right system of checks and balances in place, you can ensure your business is operating as cost-effectively as possible.
Business owners should also make every effort to only carry the products they need. Being selective about inventory will help save on monthly carrying costs while minimizing costs related to these risks.
For example, if you’re already paying rent for space, using that space effectively can increase dispensary revenue and profits. What’s more, adding storage shelves or cabinets to that space can help you store more product, allowing you to purchase in bulk at a discounted rate.
Manage Your Inventory
Inventory control is one of the most critical aspects of operating a marijuana dispensary. Government regulatory requirements in the US demand dispensaries closely monitor their inventory. Without a POS system in place to manage inventory data in real-time, inventory audits and discrepancy reporting are nearly impossible, and this can result in costly compliance violations that put dispensaries out of business.
Also, if you lose track of what you have, you could find yourself with excess products and nowhere to store them. Or worse, if your records aren’t accurate, you could run out and jeopardize the health and well-being of your customers.
You can avoid these issues by ensuring that your inventory records are organized and up-to-date. This can also help you make better purchasing decisions moving forward.
Staying mindful of dispensary costs is essential for success in this competitive industry. Profitability depends on bringing money in. But if costs become too excessive, this can become a serious problem.
Regularly monitor your dispensary expenses and make adjustments as needed. Focus on the expenses that have the most significant impact on the business’s profitability, and outsource critical non-retail operations to experienced professionals.
Think about your marketing activities and how you can enhance them. Use your sales data insight to get the most out of your marketing budget, as well.
Dominating the Cannabis Industry with Northstar
The marijuana industry is growing exponentially every year, and attracting more people to the market means that there’s room for many dispensaries to do well in spite of competition from larger businesses.
Looking to increase your dispensary’s profitability? Northstar scales dispensary profit margins successfully with the right financial guidance.
Contact us now to learn more about how we’ll grow your dispensary in this budding space.
If you liked this post, here are a few others you might enjoy, too!
More often than not, cashing in on the cannabis industry can be tricky, especially when you’re new to this type of business. It is also very likely that you’ll need assistance with organizing and filing your taxes if you come from a background in non-cannabis-related businesses.
Keep reading to learn how our experts minimize tax liability and maximize cannabis company profits with the right systems and procedures in place.
Looking for a cannabis CPA in California? Let Northstar lead the way!
Contact us now to speak with one of our tax and accounting experts about how to scale your operation with financial expertise.
What is a Cannabis CPA?
A cannabis CPA offers tax and financial services for the people and companies operating in the legalized medical and recreational cannabis spaces in states throughout the country. These services involve handling taxes, business structuring, and obtaining financial support.
What does a cannabis CPA firm do for cannabis CEOs?
A CPA that exclusively serves cannabis companies understands the industry and the federal and local laws surrounding it. It’s always best to go with a specialized cannabis CPA firm as cannabis companies need more than generalized tax services.
The cannabis industry is a special sector, and as such, it demands industry expertise to ensure compliance. Accounting from public accounting firms has the potential to cause problems, even with something as simple as tax preparation.
While working with a cannabis CPA firm, cannabis CEOs partner with an accounting firm that understands cannabis accounting. From tax services to assurance services, someone who specializes in cannabis accounting will provide the proper guidance to ensure compliance with internal controls and industry-specific professional advice.
How do these ancillary services help cannabis CEOs scale their operations?
Cannabis accounting is a specialized field and should be treated as such. While the federal government has placed various restrictions on our cannabis clients, our mission is to handle all regulatory challenges in place to ensure appropriate tax planning and other services to cannabis companies.
Cannabis CEOs can rest assured that federal-level accounting issues never become a problem. By working with Northstar, CEOs operating in this industry are guaranteed compliance and ensure their businesses are always audit-ready.
The California Board of Accountancy (CBA) on Cannabis
The California Board of Accountancy (CBA) understands that a certified public accountant interested in providing accounting or advisory services to cannabis-related industries will need to understand this space. However, some advisory firms also have an interest in operating with cannabis clients.
At this point, the CBA is not able to issue legal opinions on cannabis accounting services. With this being the case, no position statement is to be issued by the CBA on this topic.
However, the CBA has issued some insight into operating a CPA firm that serves the cannabis industry. Here’s a quick FAQ that answers questions an industry-specific CPA firm might ask:
CBA Cannabis Industry CPA Firm FAQ
What is the new California law about cannabis that just passed?
California Governor signed Assembly Bill (AB) 1525, which took effect January 1, 2021. This bill provides a safe harbor for licensed individuals or firms that practice accounting if they render services to California’s cannabis industry.
The bill states that authorized persons or entities do not commit a crime under California law if they receive deposits or provide transportation and financial services to people licensed in commercial cannabis activity. However, the authorizations can be rescinded by the licensee at any time.
Can we accept a Licensed Cannabis Business as a client?
AB 1525 will take effect on January 1, 2021, and it provides that those who practice as a Certified Public Accountant in California can offer services to cannabis entities without it being considered criminal.
What are the potential risks of providing services to a Licensed Cannabis Business?
While it is legal to use cannabis products from state-licensed businesses in California and more than half the other individual states, they remain illegal federally.
Federal law states that any entity that supports illegal activity or accepts fees from it is engaging in racketeering. This means accounting firms, banks, insurance companies, and financial institutions may be breaking federal laws by doing this. It’s important to consult legal counsel before entering into such an arrangement because of the consequences.
Any other factors to consider when choosing to accept a Cannabis client?
In August 2016, the 9th Circuit Court ruled that medical marijuana laws are legal in accordance with state law. The federal government cannot prosecute people who grow and distribute medicinal marijuana under state laws because it would be unconstitutional to do so.
The decision to allow medical marijuana in the state of Arizona was based on a few factors. One factor is that Congress has passed laws preventing federal agencies from interfering with states’ implementation of their own statutes regarding medical marijuana.
As the differences between states and federal laws persist, Certified Public Accountants (CPA) are becoming more concerned with their professional liability insurance policies. In order to reduce the risk of a lawsuit or claim against them, CPAs should take note that there may be exclusions in their policies.
Cannabis Companies & Federal Law
Cannabis companies must comply with state and federal law. But when it comes to laws at the federal level, cannabis accounting firms must know how to navigate them appropriately.
Business expenses for adult-use and medical marijuana-related operations are the same in both of these spaces. However, when it comes to deductions for expenses, these operations need a crafty accounting method to minimize tax liability.
As mentioned earlier, public accounting firms can cause problems with things as simple as tax preparation or filing returns. Accountants may be unwilling to work with companies working with or selling cannabis due to a lack of education and knowledge about the industry.
Accounting Services for Cannabis Business in Cali
Our cannabis accounting firm has a combined 120+ experience working with cannabis. As a full-service financial firm, we handle everything accounting-related for our clients.
From tax planning and compliance advisory services to ensuring our clients are committed to compliant practices, we’re here to help any legal business operators working in the cannabis industry.
Financial Services for the Cannabis Industry
Bookkeeping & Internal Accounting
We encourage efficiency and increase scalability long-term with our virtual accounting and tax offerings.
Here’s what you can expect:
Comprehensive & up-to-date books to offer the IRS everything they need to see in case of an audit.
Historical financial records cleanup to ensure all taxes and money owed have been handled appropriately.
Monthly reconciliation pack to ensure audit & investor readiness that helps companies bypass potentially critical issues.
Auditable & accurate cost accounting, including payroll management and other aspects of your operation that the IRS wants to see in your documentation.
Present monthly financial statements to keep the focus on your company’s success.
Controllership, Financial Processes, & Controls
The economic impact of COVID-19 has made these business accounting services more important than ever. With these our expertise in the cannabis sector, your business will meet its financial goals through improved governance and due diligence.
Here’s what you can expect:
Optimize financial systems in preparation for tax season.
Create & manage financial policies & procedures.
Internal & external audit preparation to satisfy the IRS and minimize tax liabilities.
ERP and IT system integrations to maintain adequate records of everything from the cost of goods sold to taxes.
Assess & manage financial risks to minimize tax liability and optimize money.
Chief Financial Officer (CFO) & Treasury
Northstar provides value to your business by improving inefficiencies, reduce expenses & enhancing earnings.
Here’s what you can expect:
Accounting and financial oversight for your cannabis business.
Cash-flow planning & management for your business.
Financial modeling & forecasting to set a roadmap for your business.
Key performance indicators & MIS dashboards to keep your business on track for success.
Strategic financial insight & analysis to keep the focus on your goals.
Investor & Board Management
Northstar gives advice and increases confidence for shareholders, board members, and company leadership. This leads to reliable partners that trust in your business as operators incorporate strategies that scale.
Here’s what you can expect:
Annual & interim reporting for sales, pay, distribution, and more.
Quarterly financials & business updates for the account.
Financial interface for board members & investors to focus on the success of the operation.
Board representation for partners.
Business decision support for everything, from costs and payroll to taxation, and more.
Fundraising & Development
Besides tax- and accounting-related services, Northstar will help you meet your short- and long-term capital goals. By structuring beneficial transactions and establishing crucial relationships, your operation will thrive.
Section 280e is notorious in the cannabis industry. This tax code inhibits most cannabis businesses to report their profits and gain recognition from the IRS.
Section 280e has been a roadblock for many operators in the industry. It has made it hard for these businesses to succeed. However, it’s certainly not impossible.
Despite cannabis’s status as a Schedule I Controlled Substance, it’s possible for cannabusiness owners to write some cannabis business costs off. The internal revenue code is a hindrance for cannabis entrepreneurs. But it’s possible to reveal deductible costs with the right insight.
In this article, we provide insight into Section 280e. We explain what it is, what cannabis businesses should expect, how to avoid an IRS audit, and more.
Looking for expert financial services to maximize your tax deductions? Northstar is here to guide you!
Contact us now for more information on how we help cannabusinesses relieve the tax burden of 280e.
What is Section 280e?
Section 280e is an IRC that dictates how the cost of goods sold and other business expenses work for the cannabis industry. It serves as a legal basis for the IRS to tax dispensaries on their profits because they believe it’s a trade or business without ordinary income or loss.
What is the History of the 280e Tax Code?
The 280e tax code was created in 1982. It was a time of intense public debate over drug laws. The 1980s War On Drugs prompted the implementation of stricter laws for marijuana and other substances.
The Reagan Administration created Section 280e after a court case during which a convicted cocaine trafficker claimed he should be allowed to deduct ordinary business expenses under federal tax law. Then, in 1982, Congress implemented 280e to ensure other drug dealers from doing the same. Through this law, no deductions are allowed “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”
This was before the legal cannabis industry existed; a time when drug smugglers and kingpins were earning millions of dollars through the black market drug trade daily. The federal government used the 280e Tax Code to ensure that an illicit operation involved in trafficking could not obtain tax deductions.
However, some members of Congress now believe the government has taken Section 280e too far. They feel that it has had an “adverse effect” on legitimate cannabis businesses. But the bill is still in place.
What is the Controlled Substances Act?
The Controlled Substances Act (CSA) is the law that paves the way for 280e. It’s one of the federal government’s most commonly used tools to criminalize cannabis.
Through the CSA, the federal government regulates the manufacture, possession, use, and distribution of certain drugs. This system considers cannabis in the same category as heroin and LSD.
The Act created five schedules to classify controlled substances based on their risk for abuse: Schedule I drugs are deemed highly addictive with no medical value; whereas Schedule V drugs have a low potential for addiction and accepted medical uses.
Cannabis, however, has been placed in the most restrictive category: Schedule I. This puts every legitimate cannabis business in violation of federal law. And with Section 280e in place, legitimate cannabis business owners have accounting difficulties that stem from what would normally be considered ordinary business expenses.
What Does Section 280e Do?
Section 280e prevents cannabis businesses from deducting business expenses when filing taxes. This includes cost of goods sold. In short, it taxes cannabusinesses on their gross profit.
This is different from a normal business. A normal business can deduct its operating costs and other expenses under section 162 of the internal revenue code (IRC). Although cannabis cannot be deducted, section 280e allows for some cost deductions. However, it’s not ideal for most businesses and comes with a risk of an IRS audit if the federal tax isn’t appropriately accounted for.
Why Is 280e Harmful to State-Legal Cannabis Businesses?
One of the biggest reasons why marijuana businesses would rather not have 280e in place is because it taxes them at a higher rate than normal businesses. This makes it difficult for legitimate cannabis business owners to compete with unlawful operations and other industries in the marketplace.
There’s a relatively simple formula to determine federal income taxes. You begin with gross income, minus business expenses to determine taxable income, and then pay taxes on this money.
However, for a cannabis business, the operations must pay taxes on gross income. Generally speaking, this results in legitimate cannabis industry business operators paying tax rates of 70% or more. This is nearly double the amount the business actually earns in some cases.
How Does 280e Tax Code Apply to Cannabis?
Section 280e makes it harder for legitimate marijuana businesses to succeed. It prevents legal cannabis business owners from deducting expenses for producing, purchasing, or distributing their product.
In most cases, this results in a higher tax rate than the normal 25%. Because of this, some cannabis industry leaders have begun pursuing legislative solutions to change the code and allow deductions.
Tax Code 280e for a Legal Cannabis Business
Legal adult-use or medical marijuana operations are working with a controlled substance. At least, according to federal law. But just because cannabis companies work with cannabis does not mean they cannot avoid the tax court.
How to Avoid a 280e Tax Code Violation
Avoiding a tax code violation as a state legal operation means a cannabis company must stay in compliance with its state’s laws. Because federal law takes priority over state law, this means companies must determine whether a violation exists in their respective states.
In many cases, cannabis operations are complying with the 280e tax code by splitting their marijuana companies in half. By operating two entities under one roof, some deductions are achievable.
Business One owns or rents the building. This involves handling the storage and transportation. It also offers employment benefits, hosts company events, and covers maintenance services. Non-cannabis products like t-shirts, keychains, and pipes can also be sold by this business.
The second related business handles cannabis directly. This can involve growing, curing, and packaging cannabis. It also should include minimal overhead-related expenses. The main expense that should be included in this operation should be the inventory itself.
Steps to Resolve 280e Tax Code Violations
To ensure your taxable year has as many deductible expenses as possible, your cannabusiness should avoid incorporating as an S-Corp or an LLC. This is because of the unique restrictions this code pushes on these U.S. operations.
Cannabusinesses in the U.S. should reduce their corporate tax liability and facilitate accounting by incorporating as a C-corporation. C-corp business operators get taxed on their salary and/or dividends. Since this is a different structure, you can reduce how your cannabusiness pays taxes. But you might only need to use this strategy for the second business if you use the split strategy.
How to Avoid Paying Taxes from Gross Income Under 280e
You cannot completely avoid paying taxes under this code. But a deduction or credit shall be possible if you know how to calculate goods sold COGS (Cost of Goods Sold).
Cost of Goods Sold
What is Cost of Goods Sold?
Cost of goods sold is a business expense that applies to most retailers. It’s an important accounting measure for companies like Canna Care Docs. COGS helps cannabis businesses keep track of how much they pay for individual products and materials.
COGS allows business operators to handle the indirect costs of doing business while bypassing some of these tax limitations.
Which Expenses Are Deductible Under 280e the Tax Code?
COGS are deductible under this code. But this varies throughout the marijuana industry.
Expenses directly related to your operations can be deducted. For instance, as a cannabis cultivator, raw materials and supplies are directly related to your operations.
But inventory costs should also be considered for cannabis entrepreneurs.
You can deduct COGS. But this is limited to the cost of the product and the costs related to obtaining your merchandise. You can deduct electric bills for inventory areas, too.
However, everything else is subject to this code’s limitations. You cannot deduct employee salaries, advertising costs, rental fees, etc.
Financial Services to Handle IRC 280e Issues
We recommend getting professional assistance. The right financial services have the potential to save some marijuana operations thousands, hundreds of thousands, and, yes, even millions of dollars.
Appropriately handling taxes and documenting everything gives marijuana operations the ability to scale successfully. But, most of the time, it’s easy for cannabusiness owners to push their obligations to the back of their minds until the season comes along.
This is why we recommend using our fractional CFO services. These services are especially beneficial to operations that don’t need a full-time CFO in-house and would prefer the flexibility we offer.
Looking for expert financial services to ensure your net income gets the best effective tax rate possible? Northstar is here to guide you!
Contact us now for financial services that will scale your marijuana business and guarantee your success in case of a tax audit.