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.
The California cannabis industry has not come this far without feeling some growing pains. But, besides state law overregulating this industry, even a business operating with California law in mind has a serious obstacle to overcome.
Of course, we’re talking about the banking situation.
The Cannabis Industry Banking Dilemma
The financial relationship between cannabis operations and the finance industry has been strained. Due to the legal implications put in place at the federal level, banks and credit unions have not been able to provide safe harbor for these operations.
But as legal cannabis has expanded, more banks and credit unions have begun providing services that aim to enhance legal business in this industry. Even without the full support of President Joe Biden, California law has become more progressive for the legal cannabis space.
In this article, we discuss how California state laws regarding the financial industry have changed. While a business operating in cannabis used to have to operate on a cash basis, we see California opening the industry with its bill, the SAFE Act.
Looking for financial services to scale your business in California? Northstar understands that these services are core business necessities!
Stop operating on a cash basis! Contact us now to learn how we can provide a safe harbor for your business in the cannabis space.
Banking Options for Cannabis Businesses
Recently, the House approved a cannabis banking bill that has the potential to expand California’s cannabis industry. This legislation lets banks provide financial services to cannabis businesses in states that have already legalized cannabis.
The bill clarifies that the money earned by legitimate cannabis businesses is not illegal, directing federal regulators to create rules regarding how they will supervise cannabis banking activity.
Historically speaking, many banks have refused to work with cannabis companies. It’s even been a challenge to find a credit union willing to work with cannabis!
These financial institutions justifiably feared they could violate federal laws by working with cannabis operators, despite the existence of the legal cannabis industry.
With this being the case, few options – besides operating on a cash basis – were available for cannabis companies. Only a few financial institutions were willing to offer banking services, which meant many had to conduct business in cash.
What is the Safe Banking Act 2021?
The SAFE Banking Act of 2021 was a bill that the American Bankers Association lobbied aggressively to pass. This group wrote the following to lawmakers:
“Banks find themselves in a difficult situation due to the conflict between state and federal law, with local communities encouraging them to bank cannabis businesses and federal law prohibiting it. Congress must act to resolve this conflict.”
Through the SAFE Banking Act, the cannabis industry obtains access to banking services and other financial services. Financial institutions no longer have to fear that they’ll get penalized for providing these banking services to legitimate cannabis businesses.
Now that the SAFE Banking Act has passed, California cannabis businesses have more options for financial services than ever before. Rather than being limited to a handful of financial institutions and credit unions, those operating in the state’s cannabis industry have more accessible options in the banking industry.
California Cannabis Industry Association on Banking
Giving businesses the ability to access loans and other banking services is essential for any company. But for a cannabis business operator, these services have been hard to come by.
Due to the Controlled Substances Act that the federal government put in place, state financial institutions and credit unions have been hesitant to take on cannabis clients.
Handling marijuana-linked money is scary for other financial institutions, including many California banks. But despite many banking institutions refusing to work with adult-use and medical cannabis business operators, California law has enabled more access to banking services for the marijuana industry.
CCIA Partnership with North Bay Credit Union
The California Cannabis Industry Association has also announced its exclusive partnership with the North Bay Credit Union. Through this partnership, CCIA members have direct access to banking, which has allowed licensed cannabis businesses the opportunity to get the banking services they need.
The struggle to pay staff and vendors without access to financial institutions encouraged this partnership. Even though many cannabis companies operate compliant businesses, they lacked access to banking.
The CCIA, a state and federally registered nonprofit trade association, lost its third bank account in a year during 2017. The association then decided to partner with the NBCU to gain access to the financial services it had been denied.
Through this partnership, members of the CCIA were able to bypass the financial institutions that refused to provide marijuana companies with wire transfers, ACH processing, and other banking services. Now, members of the CCIA have various banking options, including access to:
Online bill payment
Wire transfers and ACH processing
Even the employees of CCIA members have access to these services if they join as individual members of this credit union.
According to the Financial Crimes Enforcement Network (FinCEM), the number of financial institutions banking for licensed cannabis businesses has shown a slight decline since the 1st Quarter FY2020 (December). This began with the release of FinCEN’s guidance for providing financial services to those operating hemp-related businesses.
However, it’s possible that the COVID-19 pandemic is increasing this decline for the following reasons:
Many adult-use cannabis and medical marijuana dispensary operations have ceased operations because of government-imposed quarantine restrictions.
Even though the 90-day window for filing Suspicious Activity Reports is still in place, more financial institutions lack the staffing needed to file these reports efficiently. This has caused delays.
Cannabis Industry Banking FAQ
Can dispensaries in California use banks?
Since financial institutions are at risk while offering services to dispensaries, many choose to avoid working with them.
Thus, many California dispensaries have not been able to use direct deposit, checks, and credit card transactions. But what’s worse is how many dispensaries have had to resort to solely accepting cash or cryptocurrency.
Will banks finance cannabis?
Traditional banks are not willing to lend to Cali cannabis businesses. With this being the case, federal legalization could change this. But with the Safe Banking Act’s passing, cannabis businesses can now find reliable capital sources.
Concluding on Cannabis Banking in California
Whether you operate in Santa Rosa or Los Angeles, banking has likely been an issue for you if you operate a cannabis business. But with the passing of the Safe Banking Act, the industry now has more options than ever before.
Since the passage of this bill, more financial institutions have begun offering services to cannabis companies. But it’s important to be aware that many individuals within these institutions still have mixed feelings about supporting dispensaries.
Nevertheless, California cannabis business owners should keep their eye on the future. With more banks finally willing to work with them, prospects are looking brighter than ever before.
Interested in scaling your California marijuana business? Your experts at Northstar are ready to help!
Contact us now to learn how our financial services will expand your operations and minimize your tax liability in California.
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Whether you’ve recently decided to start a cannabis business or have been in the industry for years, raising capital can be one of the most challenging aspects of the entrepreneurial experience. However, it’s particularly difficult to finance cannabis businesses because the industry is still gaining its footing.
The cannabis industry is still very young, and there are ways that entrepreneurs are getting creative with financing ventures. In this article, we explain how you can use cannabis financing effectively, cannabis business lenders and investors, loan types, and more.
Looking for expert assistance managing your cannabis business’s financials? Northstar is here to guide your success!
Contact us now for the help you need to ensure consistent cash flow and successful scaling.
How to Use Cannabis Financing
Cannabis financing is just now taking off in this young industry. Funding is essential for development, and for those who don’t have deep pockets, finding a source of cannabis business funding is crucial for success.
But acquiring a cannabis business loan is only part of the complexities surrounding this topic.
Cannabis business owners that obtain a cannabis business loan need to have a plan to become profitable. Or, if the operation is already turning a profit, how to increase those profits to ensure any cannabis loans can be paid back while scaling those profits.
Have you considered how to effectively utilize your cannabis business loan to ensure success? Here are some ideas marijuana businesses can utilize:
Whether cannabis businesses focus on recreational marijuana, medical marijuana, or operate as one of the many ancillary cannabis companies, facility construction can play a role in operational success.
Cannabis business owners are unlikely to find a facility that’s completely ready to operate. While the facility might come close to perfection, some investment will be essential to ensure it’s ready to operate – unless it’s an M&A for an established operation, of course.
However, if you’ve already found your property and need to build a facility, this will cost money. Your facility will need to meet the needs of your cannabis business, and allocating some – or even all – of your business loan may be essential to ensure your business can begin operating.
To Hire More Staff
Solopreneurs aren’t common in cannabis. Most of the time, financial institutions willing to offer a small business loan to cannabis business operators will want to learn more about your team before offering to finance your cannabis business.
However, even with a winning team in your corner, hiring more staff can facilitate multiple areas of growth for your business. With this in mind, it may make sense to obtain a loan and use some of the proceeds to hire staff – particularly, technical staff if it’s not an area you’re familiar with yourself.
Marketing & Advertising
Cannabis business loans are also allocatable towards marketing and advertising cannabis businesses.
Even if you have a marketing budget, think about how your business will spend its dollars wisely – and whether it’s necessary to pay for all of that marketing or if attracting more customers can be done with less investment out of your business’ budget.
This can also apply to any ancillary cannabis-related businesses. Pushing business financing towards marketing and advertising has the potential to give a cannabis business the fuel it needs to succeed, and if it results in an excellent ROI, it becomes easy to justify the expense.
Manage Cannabis Business Cash Flow
Business cash flow is a concern for any business owner. But for cannabis business funding, it becomes even more essential to consider.
Cash flow is the money that comes in and out of a business on a regular basis. For businesses operating in this space, this can be especially useful when it comes to paying for inventory – and if you have trouble funding your business with your current revenue, managing your business cash flow may become even more important than making strategic investments to grow your cannabis business.
Open a New Location
Your cannabis business might be doing increasingly well with each passing month. But at some point, there’s a chance you’ll want to open a new location.
This is where business loans can remove some of the wait time for business owners in the process of scaling their cannabis companies.
Rather than saving money to expand marijuana businesses, savvy ganjapreneurs obtain business loans to finance their new location. This has the potential to increase revenue significantly while the cannabis business pays back the business loan over time.
Equipment Financing and Leasing
Equipment financing has become commonplace in the cannabis industry. Rather than investing thousands of dollars to obtain the necessary equipment to conduct business, these financing solutions allow business owners to pay for the tools they need over months or even years.
For example, a cultivation operation lacking cannabis business funding can use equipment financing to pay for the cannabis grow lights, cultivation equipment, and irrigation systems they might need to start their business.
Equipment leasing works similarly. Rather than purchasing equipment outright, many businesses go with an equipment leasing option to obtain the necessary tools and machinery they need to get started.
Lawyers, Accountants & Other Professionals
Hiring a lawyer or someone to handle cannabis accounting can be essential for any cannabis business – especially if it’s your first time operating in this industry. However, engaging the services of a professional doesn’t always come cheap.
While a lawyer or CPA can help you avoid cannabis compliance-related legal trouble, they also charge fees for their time. If your cannabis business is just getting started, it might make sense to obtain business loans and use the funds to hire professionals who can assist in areas that aren’t up to par with industry standards.
Software & Security Systems
Compliance is crucial in the cannabis industry, and many states require cannabis businesses to use specific software and security systems, especially if they’re a hands-on operation. For example, METRC is essential if your business operates in one of the legal cannabis states that use it.
Using cannabis business loans for software and security systems can be ideal if you don’t have cash on hand. It’s also important to consider long-term planning and how using a business loan for this type of investment can result in savings over time.
Cannabis Business Loans
Where to get Cannabis Business Loans
Cannabis businesses might find it challenging to get small business loans. However, options for business loans exist. While cannabis business funding might take some creativity, business owners can acquire the capital they need to scale their operations in the cannabis industry.
The federal government has made it increasingly difficult for cannabis industry participants to obtain loans, whether for medical marijuana operations or business owners handling recreational cannabis.
Here’s are some of the most common sources for cannabis business loans:
Cannabis business financing options are available to this elevated space. But cannabis business financing solutions are still quite limited.
Business owners can check with several traditional lenders to see if that will work. But a financing company willing to offer cannabis business loans is usually one of the best methods for business funding.
Diamond Business Loans is one financing company operating out of California. This business helps cannabis startups and established operations find business funding through three main programs. The company offers an unsecured capital program, an equipment program, and a commercial real estate purchase program.
Other financing companies offer cannabis business loans, too. Some of these include Dynamic Alternative Finance, GoKapital, Small Business Funding, and United Capital Source.
Venture Capital Firms
Venture capital firms are becoming increasingly common in cannabis. This sort of funding is a good option for small business owners operating in the marijuana industry who would prefer to avoid taking on debt.
Equally important to understand is that a marijuana industry business owner that accepts funding from a venture capital firm is diluting his or her ownership percentage of the business. Thus, if your business is already earning money, it could be best to look for revenue-based business loans instead.
Most small business owners in the marijuana industry look at many grow facilities lenders and alternative lenders before choosing from the VC firms that are willing to work with a cannabis company. However, for those looking into these funding options, Casa Verde, Tuatara Capital, L.P., and Privateer Holdings are the VC firms that invest in the most cannabis and hemp businesses
Cannabis Business Loan Types
Small Business Loans
Small business loans are offered by banks and other traditional lenders to small businesses that need capital but operate outside of the cannabis industry. While funding options for this space are limited at many of the financial institutions regulated by the federal government, a cannabis business owner might still be able to find a small business loan.
Business owners seeking financing through banks or credit unions might obtain a loan based on their company’s revenue, cannabis equipment, assets, or personal guarantee.
The good news is that there’s increasing interest in offering cannabis loan options to small businesses. Meanwhile, some banks are starting to look at these companies as potential clients and offer cannabis business loans.
Business Cash Advance Loans
Some financial service providers may offer a merchant cash advance. However, this is usually one of the most expensive forms of alternative financing, and small business owners are usually better off steering clear of these cash advance options.
Cash advances are only recommended in extreme situations when no other options are available. It’s quite easy for a marijuana business to get behind when they choose to take a cash advance, and it’s important to remember that a business cash advance should be considered as a last resort.
Real Estate Loans
Commercial real estate leasing isn’t always an option for cannabis. Federal government restrictions on these operations make it less appealing to rent the property out.
This is where real estate loans can offer a cannabis business owner the option to buy real estate.
A real estate loan involves a formal loan agreement that helps a business owner purchase property and pay back the loan over time with interest. The loan proceeds to get paid off, and most business owners have a plan in place to ensure they have the capital to make the payments through their day-to-day operations.
Cannabis Working Capital Loans
Another type of cannabis loan is the working capital loan. These types of loans offer financing options for daily operations and are often an attractive option because they don’t require collateral, although the lending institution will review your cash flow and personal credit score to determine whether or not you qualify for a loan.
If your cannabusiness requires more funding than is offered by other commercial real estate financing options, it may be time to look into a working capital loan.
Cannabis Acquisition Loans
Cannabis acquisition loans are available in the cannabis industry, and some of these financing options can help a business owner purchase real estate or other assets.
These loans offer less debt than what’s found with typical acquisition loans, making them more attractive to those who are interested in large-scale operations. Cannabis acquisition loans are secured against property owned by business operators; therefore, this type of financing is only available when a business operator owns real estate.
Bridge loans can help a business owner acquire more funding when they need it most.
These loans provide the financial support that’s needed to purchase more inventory or property without having to pay for anything upfront.
Once a loan has been approved, business operators can keep their day-to-day costs low until capital raises have been made and other financing options have been considered.
A bank loan is another type of financing that’s available to marijuana businesses. But these loans have the fewest options as compared to other types of cannabis loan products.
A bank loan is also one of the most difficult forms of financing for a cannabusiness owner to obtain because banks are usually resistant to offering these products unless they’ve already received approval from their federal government regulator. Regardless of business credit or your credit score, most businesses in this space will have difficulty getting a bank loan because of federal regulations.
Private loans are a popular funding option for cannabusiness owners.
These loans are usually offered by family members or friends who wish to offer financial support without any strings attached. The simple nature of these loans can help business operators secure the funding they need within days and keep their day-to-day costs low until revenue has been raised.
Term loans are often used in the cannabis industry because they offer a fixed, predictable source of financing.
These loans are secured by an underlying asset, and interest rates can be adjusted over time. This offers business operators another way to secure funding for a positive cash flow situation with little risk involved.
SBA loans are one of the most popular financing options for new businesses in the cannabis industry.
The Small Business Administration (SBA) offers funding to cannabusiness owners who are interested in starting a business from scratch or purchasing real estate that would otherwise not be available to them with traditional lenders. The SBA has numerous guidelines and restrictions surrounding their loans, but if approved, these loans can help business operators secure enough capital to open doors and get started.
Cannabis Business Financing Solutions
Financing exists in this elevated space. Here are a few we recommend exploring if you aren’t already:
Invoice financing is a form of financing that helps cannabusinesses generate enough capital to pay their employees, taxes, and other business expenses.
Invoice financing is also beneficial for those who need help generating revenue because it allows them to purchase inventory upfront using an invoice rather than waiting for customers to pay.
While some companies might base their invoice financing options on a cannabusiness owner’s credit score, business credit usually works for the purpose of invoice financing.
Equity financing for cannabis businesses is also a popular option. The majority of businesses in this space aren’t eligible for traditional financing products because the legal regulations surrounding cannabis are so new.
Equity financing allows business operators to access funds from investors without paying any fees upfront. This form of financing is often provided to cannabusiness owners who already have a positive cash flow and need capital to help them scale their operations and bypass traditional lending guidelines.
If you have a high credit score, besides being eligible for cash advances, you likely have good personal credit. This form of credit can also be used as business credit.
Your business credit the same as your credit score and can be used for financing purposes such as investing in a cannabis company or borrowing money to purchase cannabis equipment.
The SAFE Banking Act has lessened the restrictions for cannabis lenders at the federal level. While many lenders still refuse to see those working with cannabis value as a potential customer, the fact that restrictions have eased at the federal level is enough for some lenders to allow cannacompanies to open a bank account and use these services.
Lenders may offer solutions to allow cannabusiness operators to purchase new or used equipment, property, and other expenses. But it’s important to remember that not all lenders are willing to provide loans to cannacompanies.
Alternate lenders and investors are equally important to consider. Here are some of the options available for cannabis:
Cannabis specific funds and a few hedge funds
High net worth individuals
Musicians, athletes, and other celebrities
Business incubators and accelerators
Industry-specific holding companies
Recently, people have been using crowdfunding to start new businesses. There are many crowdfunding platforms available.
For example, some of the platforms cannabusinesses can use are Indiegogo and Kickstarter. Indiegogo has approved some cannabis companies for raising money through their platform.
Other known platforms include StartEngine, which has also approved funding requests for cannabis startups. Lastly, SeedInvest is a platform that welcomes cannabis companies to participate.
Concluding on Cannabis Financing
Whether you need to purchase property, don’t have working capital, are looking for a way to get the equipment you need, or something else, financing options are available. Hopefully, you’ve found the financing solution your cannabusiness needs in this article.
While the credit unions are beginning to support cannabusinesses, raising capital can be challenging for these operations. The space is still young, and as it matures, we expect to see more financial institutions offering support to elevated businesses.
Northstar: Guiding Cannabis Industry Success
Looking for expert financial guidance in the cannabis space? Northstar is here to guide you!
Contact us now for the financial services your operation needs to scale its success!
Becoming a legal grower or cannabis nursery business operator in Cali might seem like a daunting task, especially if you’ve been making your living as a part of the legacy industry. But while it takes some time to acquire the right cultivation licenses, cannabis businesses that go through the steps to become legitimate ultimately prosper long-term.
The cannabis industry is thriving in Cali. While regulations ensure the state’s medical marijuana patients and recreational consumers stay safe, cannabis growers must do their part to guarantee compliance.
Cultivation laws can be a bummer for some, but for most, these rules ensure cultivation licenses for each qualified cultivation facility. This article covers the ins and outs of obtaining a cultivation license in California – including some of the license fees – while bypassing run-ins with local law enforcement.
Guide Your Grow with Northstar
Interested in scaling your cannabis cultivation operation in Cali? Northstar has you covered!
Contact us now to learn how we can guide your budding marijuana business in California with the right financial services.
History of Adult-use & Medical Marijuana in Cali
Governor Jerry Brown officially signed the Medical Marijuana Regulation and Safety Act (MCRSA) into law on November 8, 2016. The law includes three separate bills (AB-266, AB-243, and SB-643), which established the foundation for medical marijuana regulations and the state’s licensing program.
Medical marijuana was legalized in Cali in 1996. But the state has come a long way since then.
At this point, the state has beyond 2,800 marijuana businesses operating. This industry is on track to become a billion-dollar industry, which is why both adult-use and medical marijuana growers like you need the insight to join the legal space.
Legalization has also encouraged other states bordering California, like Arizona and Nevada, to implement similar frameworks. And as more states follow suit with legalization, we can expect cannabis grow businesses to enjoy even more support in the community.
California ignited the cannabis craze in the United States, and with this legislative progress, we’ve observed others following in this state’s footsteps.
As time passes, we expect other states to progress to Cali’s level, but for now, let’s cover this state’s cultivation laws for some additional insight into the way growers can operate in California.
Cannabis Cultivation Laws in Cali
A qualified patient is legally allowed to cultivate medical cannabis under the Compassionate Use Act. However, they need a physician’s recommendation to use and grow their own cannabis for medical purposes.
The Compassionate Use Act (CUA)
The CUA allows a qualified patient to possess up to eight ounces of dried cannabis and cultivate as many as six mature plants.
Because this act doesn’t allow for dispensaries, patients are typically allowed to grow the amount they need for personal use only. While no one can deny that growing in your own home is convenient, there are some drawbacks – namely law enforcement.
California Proposition 64
California Proposition 64, also known as the Adult Use of Marijuana Act (AUMA), allows adults to grow six plants per land parcel in Cali. But locals are allowed to “reasonably regulate” cannabis grown for personal purposes, even if it’s for a qualified patient. Courts are also allowed to ban personal medical marijuana cultivation, which has fueled the state’s medical marijuana program.
While those with a medical marijuana card, including a primary caregiver, can grow to fulfill a qualified patient’s medical needs, a medical patient still needs access to professionally grown medical cannabis. This is why commercial cultivation licenses have become essential.
Locals can license commercial growers, but this requires a license from the California Department of Food and Agriculture. In some instances, permits may be necessary from the state or local Water Board and Fish and wildlife, as well as CEQA analysis.
To learn more about your local ordinance code, you’ll Google the name of the county or city and the word “code.” You can also check for websites listing your locality’s marijuana or cannabis codes.
In some cases, the online listings may not have been updated for a while. With this being the case, you can look at your county or city’s council or board meeting agendas online to see the latest ordinances available.
Water Boards Cannabis Cultivation Policy
The Water Boards Cannabis Cultivation Program was placed in the state’s regulatory code by the Office of Administrative Law on December 18, 2017. This program includes four primary parts that address potential water quality and quantity problems that relate to growing cannabis.
The Cannabis Policy sets principles and requirements for cannabis farming activities. These rules protect instream flows and water quality by ensuring water diversion and waste discharge from cannabis cultivation doesn’t damage water quality, riparian habitat, wetlands, springs, and aquatic habitats.
As a cannabis cultivator, you’ll need coverage or waiver from either one or both of the State Water Board cannabis cultivation regulatory programs. To get an expedited water right for cannabis farming activities, you’ll need to opt for the Cannabis Small Irrigation Use Registration Program.
Cultivation License Requirements for Cannabis Businesses
Even if you plan to grow medical marijuana for those holding a medical marijuana card, you’ll need a cultivation license to grow your own cannabis commercially. According to Cali’s licensing process, here are the stages and licensing fees associated:
Stage 1: Preliminary Determination of Eligibility $3,258
Stage 2: Initial Ranking $701
Stage 3: Second Ranking $1,790
Stage 4: Public Meeting and City Council Final Selection $1,937
The California City Police Department also conducts a criminal background check on all applicants during the first stage. Since resources to conduct these checks are limited, just six applicants can be processed per day. Thus, you’ll need to schedule an appointment. Keep in mind, there’s a $78 fee you’ll need to pay for each background check.
Cannabis Business Cultivation License Requirements
Location, location, location! Applicants must submit a “Zoning Verification Letter” to the Planning Division in the City Hall. This documentation comes from your local Public Works Department, and the review will take around two weeks and costs $250.
While it might seem like a complicated process, it licensing for cannabis growers has several tiers. Here are the options:
Tier 1: Specialty
Tier 1 growers can use a space that contains as much as 5,000 sq. ft. of canopy or up to 50 mature plants on non-contiguous plots. The types of licenses included in this tier are License 1 (Specialty Outdoor), License 1A (Specialty Indoor), and License 1B (Specialty Mixed-Light).
Tier 2: Small
Tier 2 cultivators are allowed to grow between 5,001 and 10,000 sq. ft. of canopy. The types of licenses included in this tier are License 2 (Small Outdoor), License 2A (Small Indoor), and License 2B (Small Mixed-Light).
Tier 3 grow ops can be between 10,001 sq. ft. and one acre of canopy. However, these licenses have limited access to vertical integration options. The types of licenses included in this tier are License 3, License 3A (Indoor), License 3B (Mixed Light), and License 4 (Nursery).
Steps for Cali Cannabis Cultivation License Success
Failing to prepare is preparing to fail, and without the right preparation, it’s quite challenging to get a cultivation license in the cannabis industry. If you’re considering growing cannabis, you’ll need a license in California.
Keep in mind, the most important aspect to overcome during the application process is site selection. In fact, you’ll need to find a location that meets all regulatory requirements for your cannabis grow license.
If you have a grow site already selected, great! Now’s the time to study up on the state’s rules and regulations involved with cannabis grow licenses.
Here’s a list of the steps you’ll need to take to acquire a cannabis grower’s license in Cali:
Step 1: Create a Business Strategy & Vision Plan
At this stage, you know you want to grow cannabis. But do you know why?
Consider your commitment and capabilities, and figure out how your cannabis business will best serve the masses. Think about your goals, resources, and experience to determine how you can best contribute by growing cannabis.
For example, do you want to grow for the primary caregiver holding a medical marijuana card and patients? Or are you more interested in growing adult-use cannabis?
Think about your long-term goals here. You might find it appealing to grow quality product for every primary caregiver and qualified caregiver in your locality. However, you might be more interested in growing dried cannabis for manufacturing purposes.
But what if it’s only the lifestyle?
In some cases, wannabe cannabis business owners want to grow cannabis to live the lifestyle. They don’t consider marketing or how they’ll scale the operation with retail sales. With this in mind, more often than not, these individuals don’t last long in this industry.
As many plants grow throughout the state, the competition remains fierce. Just because you have a grower’s license in California doesn’t mean you’ll successfully grow marijuana plants a qualified patient needs.
Each qualified patient has his or her own set of unique needs. From cannabinoid content to terpenes, you’ll need to grow specific strains to meet those necessities.
This isn’t to say recreational cannabis isn’t challenging to grow. However, at the same time, it’s crucial to consider the role you’re willing to play in this sector.
This is where your strategy will play a pivotal role in your success.
If your goal is to scale your operation to the point that it’s publicly available on the stock exchange market, you’ll likely have to think about your business differently than someone who is simply in it for the lifestyle.
There’s competition in Cali for cultivation licenses, so if you’re more aggressive in acquiring your market share, you’re more likely to succeed at growing cannabis consistent for the market you plan to serve.
Whether you plant to grow medicinal cannabis for medical use or commercial cannabis to use for a specific cannabis product, the most lucrative businesses have a strategy in place – and you should, too! This strategy should also include how you’ll handle your California cannabis business tax liabilities.
Step 2: Property Acquisition
Local ordinances can be quite restrictive regarding cannabis business activities. To avoid criminal prosecution, it’s crucial to follow all restrictions and guidelines in place, including any legal advice you get from experts.
Restrictions, regulations, and permits from each locality determine where and how you can grow cannabis. To find and obtain a permissible property, you’ll need to learn more about how your local government regulates cannabis plants.
To cultivate cannabis legally, you’ll need to know about the requirements. The federal government still prohibits commercial and personal cultivation. However, some landowners will still allow those seeking a commercial license to grow cannabis within state-established limits, offering a lease agreement on a case-by-case basis.
Consider how the property can fulfill your cultivation needs and whether you can grow adult-use or medical marijuana with a cultivation license. Most of the time, if the property is owned, you probably cannot grow cannabis on it. However, in rare instances, a landowner might be willing to allow it, particularly if you plan to cultivate it as part of California’s Medical Marijuana Program.
After you get your property, you’ll need to obtain a Conditional Use Permit/Land Entitlement.
The local government and community might attempt to block your approval. Since local ordinances offer protection to residents, your property might not allow you to grow medical cannabis or the likes. This is why research is crucial at this stage.
You’ll begin by analyzing the city and county you plan to operate in. After you determine what the city or county allows for cultivation, you’ll need to check for green-zoned parcels that meet the requirements for your grow.
Consider the logistics for the property. For example, the surrounding resources, employee commute time, and utility accessibility are crucial for a successful grow op.
Think about the buildings or structures on the property, too. In some cases, these could be problematic, especially if they’re inefficient or no good for cultivation.
Consider the following to ensure your cannabis plants have a happy home that supports your success:
Bodies of water
Make sure to analyze this data to determine zoning restrictions that could impact workflow or disqualify the property in another way.
Step 3: Prepare Your Application for Approval & Cannabis Licenses
A cultivation license isn’t simple to obtain; local and state officials will want you to have your business plan organized and ready to go. Regardless of whether you need a cultivation license to grow medical marijuana or adult-use marijuana plants, local approval is essential.
Step 4: Submit Application Package to State for Approval
State approvals can be quite in-depth; they require plenty of paperwork and the right technical execution to go through.
Initially, you’ll need to submit your application package to several state agencies. However, this has been made a bit easier with the consolidation under the CDCC.
Ultimately, this means having an excellent business strategy in place and all of the right documentation for your application. This is how you’ll make processing as easy as possible.
Step 5: Get Local Approvals
Once you have your paperwork together, you’re ready to start seeking local approval.
Local government officials often worry about recreational and medical cannabis being cultivated around their homes. Thus, you’ll need to give them every reason possible to like your operation.
If there’s any reason these officials don’t like your business, you may find your project without viability.
At this stage, you’ll have technical hurdles to leap, along with political challenges to overcome. Ultimately, you’ll need to sell yourself as a cultivator and your growing operation to the local government officials to make this work.
You’ll need a “discretionary” conditional use permit (CUP). This means you’ll need to present your plan at a public hearing. Approval or denial will come to a vote from the city council or planning commission.
For your commercial cannabis grow to operate, you’ll need permits, cannabis licenses, and certifications from other local departments. This includes more environmental assessments.
The process takes time and additional funding if state regulators believe your commercial cannabis grow could pose a threat to the environment. But if you understand this before you apply, you can determine ways to reduce these possible impacts in advance.
Step 6: Maintaining Permits and Licenses
After getting your commercial cannabis licenses, approvals, and permits, complying with ongoing regulations is essential. You’ll need to know the rules at the local level and state level to ensure your cannabis operation can continue growing.
To ensure you don’t limit yourself to only one harvest, you’ll need to continue monitoring and reporting all of your business’s operations. This includes tracking your inventory through METRC.
Keep in mind, local and state regulators will inspect your cannabusiness regularly, and annual renewal is essential for multiple license types. While there was a ‘logjam’ with cannabis provisional licenses in Cali, Governor Newsom’s California Comeback Plan should help.
Step 7: Optional Vertical Integration
Over the past few years, it has become apparent that the entire supply chain operates better when it’s controlled. This is why supply chain control in Cali has become easier through these vertically integrated opportunities.
While some states ban vertical integration in cannabis, the main idea here is that this has the potential to enhance quality control and public health by keeping the supply chain more in control.
It starts by limiting third parties from getting involved in grow operations. Most of the time, cannabis plants go from cultivation to manufacturing before distribution manages the supply chain. Then, the products end up in retail shops or dispensaries.
However, vertical integration does not include testing services. This is how the state ensures that cannabis for adult and medical use is tested without bias.
Is the Market Oversaturated with Growers?
Cali is full of grow-ops working for their share of the market. Thus, it’s crucial to differentiate from other operations.
However, there’s more than enough market share to go around. Investors, business operators, and landowners that focus on cannabis have a lot of success in cultivation.
California’s cannabis space is the largest market on the planet. Each year, this industry’s demand is expanding, offering new opportunities for those interested in getting involved.
There’s no easy way to say it; Cali’s cannabis sector is tough. It’s going to take large investments and hours upon hours of work, including but not limited to manual labor. Farming marijuana isn’t easy, but for those who love it, it’s worth the effort.
Ultimately, the level of success you experience among the other California cannabis growers depends on a few variables. But with the right funding, perseverance, and knowledge, you can become successful growing marijuana for Cali’s medical and recreational cannabis consumers.
Growing Cannabis in Cali Commercially
Growing cannabis in California isn’t for the faint of heart. While license fees can be costly, it doesn’t solely come down to your funding. It takes effort, dedication, and plenty of compliance every day.
But this isn’t meant to scare you away from a potentially successful Cali cannabusiness, especially if you plan on following through with your project.
In order for you to comply with state regulations, that means paying attention to every detail. The more effort you put forth at the beginning stages, the better off you’ll be.
Grow Your Grow with Northstar
Looking to grow a cannabis grow facility in Cali? Northstar is here to help!
Contact us now to speak with one of our experts and learn how our financial services can guide your grow facility’s success!
The cannabis industry is growing, and there’s no denying it. The cannabis business is booming as more laws pass and new companies sprout up every day. It looks like the space will only continue to improve, too!
But the cannabis industry comes with its own unique set of challenges that you would never encounter in other industries.
In this article, we cover some of the most common, unique cannabis accounting challenges that make hiring an accountant specializing in cannabis essential.
Unique Cannabis Industry Challenges to Consider
State Law vs. Federal Law
While legal at the state level, the U.S. federal government still prohibits cannabis – and most related operations – from conducting business. This means cannabis businesses that choose to accept credit cards for payments, open bank accounts, get loans, or other financial transactions from the federal government can still be at risk of prosecution by the feds.
In fact, there are cases of banks shutting down cannabis business bank accounts – and dispensaries getting their payment processors shut down without warning – even in states where both medical cannabis and recreational marijuana are allowed.
Because of this issue, many small businesses operating in marijuana either don’t get set up with a traditional merchant account or get one but deposit and withdraw cash to/from each sale using a “cash-only” policy to keep it entirely off the books.
In some cases, other cannacompanies will actually decide not to take all forms of payment because they run the legal risk of confiscation by federal agents.
Cannabis business owners have trouble scaling as they are ultimately forced to operate in cash-only transactions. They also must account for their earnings in a whole different manner than traditional businesses. This results in a need for expert guidance from marijuana accounting professionals.
Furthermore, this means that cannabusiness operators cannot claim their income on tax returns, which can be problematic given the high taxes associated with legal sales of marijuana (even at state levels solely). The money that would be saved through tax returns could be allocated towards scaling, but without this option, cannabis business operators must either find a workaround or take the loss in stride.
Because cannabis is federally illegal, operators can’t claim it as an expense either. This creates another set of problems, especially when cannabis companies want to reinvest their profits. In many cases, they have no legitimate way to write off or reduce the cost of purchasing some equipment that might run into thousands or even millions of dollars.
Opening a Business Banking Account
Opening a business banking account for a cannabis company is another challenge that cannabis businesses interested in scaling face – especially at the federal level.
The Federal Deposit Insurance Corporation (FDIC) recently announced they’d be making an exception for banks that want to provide banking services to cannabis companies. Michigan supports banking for cannabis, too. But it’s not a full-on guarantee like their other guidelines for banks.
The FDIC encourages banks and credit unions to consider “cannabis activity” when deciding whether or not to open an account with a marijuana business – however, this is only advisory, as FDIC guidelines are merely suggestions rather than hard rules.
Regardless of such, advisory firms can point you in the right direction to open an account. And cannabis banking is crucial to scale your operation.
This kind of uncertainty makes it challenging for cannabis entrepreneurs looking to accept tax payments or write-offs from the IRS as legitimate businesses operating within state laws. This difficulty encourages more self-employment taxes for the cannabis industry, along with other complications – which again makes hiring cannabis accounting professionals essential for scaling.
Not All Expenses/Adjustments are Tax-Deductible
Marijuana-related expenses in the United States aren’t always deductible as business expenses. And most marijuana businesses can deduct only cost of goods sold (COGS) – not operating expenses.
This means that ancillary business activities like marketing are off-limits for tax deduction purposes, and they don’t even qualify for an ordinary deduction. Accounting and tax services are complicated for this sector for this reason, among others.
To make matters worse, COGS is generally calculated by subtracting beginning inventory from total inventory at the end of a business’s fiscal year; this could cause some cannabis companies to pay higher taxes than non-cannabis companies (as COGS isn’t always the full accounting value).
Cannabis businesses have limitations regarding how they can lessen their tax obligations, even for ordinary business expenses. This is why it’s essential to work with an expert specializing in tax planning for the marijuana industry.
Our cannabis clients receive fractional financial accounting services, including tax preparation, with specialization in the cannabis space.
Whether handling the cannabis plant or offering ancillary services to the cannabis industry, many cannabis businesses save tax dollars with proper accounting expertise leading the way.
High Margins and Low Favorable Accounting Standards
Because marijuana businesses are federally illegal, cannabis companies’ financial statements may be governed by U.S. Generally Accepted Accounting Principles (GAAP) rather than IFRS (International Financial Reporting Standards).
Compared to IFRS, GAAP standards allow for wider leeway in how costs can be calculated – which could make it more difficult for cannabis companies to have lower tax liabilities or favorable tax deductions.
Federal rules against selling cannabis cause this emerging industry to be characterized by high margins and low favorable accounting standards. This is troublesome for businesses interested in scaling.
Until federal legalization happens and the Controlled Substances Act no longer impacts cannabis tax administration, a cannabis accountant will remain essential to ensure cash management bypasses common accounting issues plaguing the industry. Whether you owe back taxes, need someone to handle your excise taxes, or want someone who understands the tax code in relation to the marijuana industry, these financial services offer a full spectrum of benefits to business operators in this space.
In-House vs. Outsourcing Cannabis Accounting & Bookkeeping Services
Cannabis accounting is a relatively new territory, especially as we’ve seen changes within state laws over time, along with the federal government’s recent announcement regarding banking regulations and their oversight of cannabis businesses.
The market for marijuana accounting is still young, but as more cannabis companies grow and expand (and need to comply with tax laws), the need for marijuana accountants has increased substantially in recent years.
Outsourcing Cannabis Accounting & Bookkeeping: The Right Choice
Cannabis businesses can benefit from hiring in-house cannabis accountants and bookkeepers. However, there are several potential drawbacks to hiring in-house accounting personnel, as well.
Hiring in-house is more costly, which is a step backward as you’re scaling your operation. While you have a professional down the hall, the additional expense of paying for a cannabis accounting professional could take away from your overall profits. And let’s not forget that with a fractional CFO, you’ll use the services as much or little as needed, further decreasing the cost.
Because managing accounting operations in-house requires more administrative and financial personnel, this could potentially limit your business’s ability to expand and hire new employees.
While hiring an in-house expert will cost you more at the outset, it’s important to consider the long-term costs of keeping cannabis accountants on staff. In contrast, a cannabis tax advisor or firm can help your company meet its legal requirements while also allowing you to avoid penalties down the road.
Learn more about the benefits of outsourcing cannabis accounting and tax specialists now.
Cannabis Tax Laws & Audits
One of the biggest challenges that cannabis entrepreneurs face is handling tax payments and writing off business expenses – especially when it comes to filing returns with state governments. These taxes range from corporate income taxes to sales taxes based on gross revenue – which can be tricky given how much money cannabis companies have been bringing in as a result of legalization efforts.
In California, where recreational marijuana was legalized via Proposition 64, there’s a 15% excise tax on all non-medical marijuana sales, and this marijuana sales tax is applied at the point of sale when cannabis products are delivered to a customer.
The state also charges cannabis companies per ounce for cultivation taxes, which must be paid in full before the end of each fiscal quarter (and if you’re late paying it off by even one day, there’s a penalty fee that adds on top of that).
An in-depth audit can reveal problems, and without the right internal controls in place, these problems can compound during an inspection. To keep your business on track to scale, a CPA firm will ensure you’re always audit-ready, ensuring your business continues operating and earning.
Inventory & Manufacturing vs. Retail Storefronts
Although both types of businesses have inventory and manufacturing costs associated with their respective services/products, retail storefronts involve much simpler accounting practices when it comes to selling goods directly to customers.
Since retail storefronts don’t manufacture or produce their own product(s), they aren’t required to track as much inventory. While tracking is still essential, these business operators can calculate the money they’ve received from customers and determine their revenue in conjunction with cannabis tax laws.
In contrast, manufacturing businesses have to account for cannabis stock on hand (which will decrease over time until it’s sold), as well as plant-growing costs associated with growing marijuana plants for sale – which must be accounted for when calculating sales taxes.
Put simply, cannabis businesses engaged in retail storefronts have an easier accounting process than those that manufacture/produce cannabis products. But tracking everything is still crucial for those operating in this space.
We recommend going beyond the minimum in accordance with cannabis compliance. Track everything and have your documentation in order in case of an audit. This is how you will ensure your business can continue scaling without accounting and tax-related troubles on the horizon.
Cannabis Accounting Software
As more states legalize recreational marijuana use and we observe changes made to federal drug policies along the way, cannabis dispensaries have had to ramp up their financial operations and ensure their work is compliant with state regulations. Internal controls, including but not limited to accounting software, are essential.
While the software does not replace a CPA firm, it can work in conjunction with one. For our clients, we usually recommend using spreadsheets to track the business’s financials and a licensed CPA specializing in cannabis operations overseeing them.
At this point, none of the software available is robust enough to fully manage the financials of businesses operating in the cannabis industry. Thus, we cannot recommend software unless it’s required by your state. For example, METRC.
However, having a fractional licensed CPA working on your business and controlling its cash flow is irreplaceable. While software can help with tracking seed-to-sale, business owners need a cannabis accountant to ensure the financial aspects of the business are conducted in a federally legal manner.
Besides the more in-depth knowledge of local laws and advisory services offered, a cannabis accountant or CPA firm offers insight into cost accounting. The software does not handle cost accounting for controlled substances as effectively, nor does it provide consulting services in conjunction with the tax services many cannabis businesses need to scale.
Protecting Finances & Inventory
Any cannabis accountant worth their weight in gold will advise you to protect your finances and inventory. The cannabis industry attracts people interested in taking advantage of the cash these businesses have on hand.
Thus, one of the first steps we recommend taking as a business operator in this industry is to ensure your highly regulated products and cash is protected.
Internal revenue can easily be taken by staff if you don’t have cannabis SOPs in place to safeguard your investment. Compliance demands of regulating authorities also require these controlled substances are locked away from potential thieves.
While those operating in the cannabis space can’t always deduct ordinary business expenses, it’s also challenging to make deductions based on stolen cash and product. With this in mind, many businesses in this industry already understand the need for protection that goes beyond the compliance demands of this budding industry.
Minimally speaking, if you sell cannabis in one form or another, you should have cannabis SOPs in place to ensure you have a log of everyone with access to your product and cash. This way, in case of a problem resulting in an audit, you know who to look at when it comes time to determine the criminal’s name.
Concluding on Marijuana Accounting to Scale
Cannabis is an evolving, premature space. But as it matures, we can expect more businesses to focus on scaling their operations.
The advice in this article will make tax planning and scaling for your business easier. Whether you’re in the beginning stages of your company’s operations or already conducting millions of dollars per year in business, the right cannabis accountant or CPA firm will ensure your business is on track for successful scaling.
Looking for cannabis accountant and CPA services to scale your operation? Contact us now to have our experts join your team!
The CARES Act, an acronym for the Coronavirus Aid, Relief, and Economic Security Act, implemented the Paycheck Protection Program (PPP). But is there an alternative that applies to the cannabis industry?
The Small Business Administration (SBA) funded and administered the PPP. This was meant to offer potentially forgivable loans to businesses impacted by the COVID-19 pandemic. It was created to cover payroll and other costs associated with operations.
Unfortunately, cannabis companies have not been given the same opportunity to obtain PPP loans. Since cannabis cultivation and sales are still illegal federally, these operations cannot get PPP loans. Furthermore, the SBA published a Policy Notice in April of 2018 to outline how prohibition impacts direct and indirect cannabis businesses, thereby banning them from obtaining SBA loans.
In this article, we discuss an effective alternative to the PPP loan for cannabis.
Interested in getting relief during the COVID-19 pandemic for your cannabis business? Contact us today to learn more about what we can do for your operation!
Beware of PPP Loans for Cannabis
PPP loans first became available in early 2020. They were extended by the American Rescue Act and have quickly become one of the most commonly discussed provisions for businesses across the country’s COVID-19 relief packages.
These loans are forgivable for some small businesses and enable them to continue paying employees without issue. However, even though many cannabusinesses would qualify for these loans, plant-touching cannabis businesses should avoid PPP loans. While some might encourage these operations to apply, the federal government’s classification of cannabis is problematic for this type of loan.
Since the SBA has its own application process, we need to look at that to determine whether or not cannabis applicants can successfully get a PPP loan. During the application, the SBA requires affirmation that they are not violating federal law under penalty of perjury. Due to the state-legal cannabis businesses’ unavoidable violation of federal law, it’s impossible to truthfully affirm that the operation does not violate federal law.
Cannabis businesses have always had trouble interacting with the government, so it should come as no surprise that applying for relief funds can be challenging. However, the Employee Retention Credit and State Small Business Credit Initiative allow struggling cannabusinesses to receive assistance from government agencies.
The ERC: An Alternative to the PPP for Cannabis
The Employee Retention Credit (ERC) is a provision of the CARES Act. Though the ERC has not been given the same attention as PPP because companies cannot get both the ERC and PPP funds simultaneously, it’s still an option. Many businesses could not qualify for the PPP or obtained PPP funds and had to return them to the government not long after.
Now, the ERC offers a fully refundable payroll tax credit that employers can use. However, it doesn’t come without the following limitations:
Half (50%) of qualified wages and health plan expenses had to have been paid to the company’s employees in a calendar quarter.
This credit only applies to qualified expenses paid between March 12, 2020, and January 1, 2021.
The highest amount of qualified wages that can be taken into account for the ERC with respect to each employee for all calendar quarters throughout 2020 is $10,000. The maximum credit for an eligible employer for qualified wages paid to each employee $5,000 (half of $10,000).
For your business to qualify for the ERC, it must experience some suspended operations due to the restrictions the government has imposed or a significant decline in gross receipts. Thus should be either a partial or complete suspension of operations.
A decline in gross receipts can be considered “significant” if the employer’s gross receipts for a given quarter at some point in 2020 drop below 50% of their gross receipts for the same calendar quarter in 2019.
Companies qualifying for the ERC need to determine how many average monthly full-time employees (FTEs) worked for them in 2019. If your company employed beyond 100 average monthly FTEs, it’s only allowed to claim the credit on wages and health plan expenses paid for your employees that weren’t working over the course of the eligible months. However, if your company had 100 or fewer employees, then you’re allowed to claim the credit for all employees, regardless of whether they were working or not.
To claim the ERC, you’ll do so on IRS form 941, “Employer’s Quarterly Payroll Tax Return.” If your company is eligible, you can reduce its federal employment tax deposits by the permissible ERC amount. However, if your ERC is in excess of the remaining federal employment tax deposits for that quarter, your company can file Form 7200 to claim an advance refund.
IRC Sec. 280E: Does this affect cannabis business eligibility for the ERC?
Yes and no.
At this point, IRC Sec. 280 does not allow federal tax deductions and credits from gross income if the taxpayer engages in business relating to the manufacturing, distribution, or sale of controlled substances classified as either Schedule I or Schedule II drugs. This is the result of the 1970 Controlled Substances Act.
Since cannabis is still classified as a Schedule I drug, the sales activity is viewed as trafficking under federal law. With this in mind, IRC Sec. 280E keeps cannabis businesses from benefiting from typical business deductions.
However, equally important to note is that IRC Sec. 280E is an income tax provision of the Internal Revenue Code. The ERC operates as a payroll tax credit. Furthermore, the CARES Act does not explicitly exclude cannabis businesses from claiming the ERC.
While ERC eligibility is questionable and the IRS has not offered guidance just yet, there’s a chance that cannabis businesses that meet all eligibility requirements of the ERC could be eligible.
More About The ERC
At Northstar, we’re helping cannabis businesses save on payroll taxes with the COVID-19 ERC. If your company has been adversely impacted by the pandemic, we’re ready to help you at no upfront cost. Simply put, we only get paid if you do! This includes 3-year FREE ERC audit support!
Here’s a quick summary of the ERC and how it offers relief to cannabis businesses:
ERC Eligibility Explained
Through the COVID-19 Employee Retention Credit, cannabis businesses can get a payroll tax credit to help ease the adverse impact of the coronavirus. The ERC is an option for employers, as well as tax-exempt and some government organizations, as long as they satisfy ANY of the following conditions:
Operations were either fully or partially suspended as a result of the orders from an appropriate governmental authority.
Its gross receipts for a minimum of one calendar quarter were less than 50% in 2020 or less than 20% in 2021 of the gross receipts they had in 2019.
The company qualifies as a recovery start-up business.
ERC Opportunity Explained
The ERC offers up to $33,000 per employee. This is meant to offset employers’ 6.2% FICA liability from March 12, 2020, through June 20, 2021, as well as 1.45% Medical Tax from July 1, 2021, through December 31, 2021. Any remaining credit gets refunded.
Your ERC is calculated quarterly as long as your business satisfies quarterly eligibility requirements. You could also capture retroactively if you didn’t capture in prior periods, as well.
With subsequent ERC changes, the availability expands, and the benefits increase in the 2020 and 2021 tax years.
ERC Process Summarized
To get started, we’ll need to determine if you’re an eligible employer for the ERC for any quarter. This will involve applying each test separately.
We’ll check your company’s employment level in 2019, as well. This will determine your ERC-eligible wages.
From there, we compute your ERC-qualified wages. This involves excluding wages used for PPP forgiveness and other tax credits.
Once we have this information on hand, we can calculate the ERC and work with your payroll provider to determine options to claim benefits. Then, we’ll complete an audit file to substantiate ERC.
Notable ERC Changes for Jan. 1, 2021, to June 30, 2021
The ERC for January 2021 to June 30, 2021, experienced the following changes:
The ERC rate per employee increased by 20%, resulting in its expansion to 70% of qualified wages. In the past, this was 50%. Furthermore, the per-employee wage limit rose from $10,000 annually to $10,000 quarterly for 2021.
Employers are now eligible based on their gross receipts of less than 80%. Previously, it was less than 50% compared to the same quarter in 2019. With this in mind, if your gross receipts drop by beyond 20% in 2021, your business is eligible for the payroll credit.
Right after the calendar quarter, you can choose to use ERC immediately rather than Q1 and Q2 of 2021 compared to the same quarter in 2019 to determine your eligibility.
For companies that didn’t exist in 2019, we’re now allowed to compare 2021 quarterly gross receipts to the same 2020 quarters to determine business eligibility for ERC.
2021 ERC credit is now accessible by public colleges, universities, organizations giving medical or hospital care, and some organizations that Congress has chartered.
The definition of a large employer changes from more than 100 employees to beyond 500 employees in 2021. Thus, companies can use this broader definition of qualified wages if they are within this threshold. As a company, this allows employers to count wages paid to their active (working) employees and those who aren’t currently working.
The Consolidated Appropriations Act (CAA) removed the limit on employees’ qualifying wages. Previously, the limit on qualified wages was the sum the employee would have been given during the 30 days prior to the qualifying period. Now, the ERC will allow companies to pay a bonus to their essential workers.
If the company has less than 500 full-time equivalent employees, they can advance ERC payments during the quarter that the wages were paid to these employees. This also includes seasonal employers, employers who didn’t exist in 2019, and part-time employees.
Save on Payroll Taxes with the COVID-19 ERC
Ready to soar your business to new heights with tax incentives? Contact us today to partner with Northstar’s experienced tax professionals.