Cannabis Accounting: 3 Reasons Why Specialization Matters

As the legalization of cannabis continues to spread across the country, many people are looking to get into the game. While many are finding great success in the heavily regulated cannabis industry, it is handy to have an ace in the hole if you want to win. One of the best cards to have in your hand is an expert in cannabis accounting.  

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A cannabis accounting professional can help with:

• Understanding complex regulations
• Limited access to financial services
• Unclear accounting requirements
• Higher tax liabilities

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All of these can play a part in hindering success in the cannabis industry. Inaccurate or incomplete accounting can spell disaster for someone trying to get a cannabis-based business up and running. It can result in fines, additional taxes, loss of investors, and unwanted legal action — all of which can end your dream of owning a successful cannabis business before you’ve even had a chance to shine.

Three Reasons to Hire a Cannabis Accountant

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1. Cannabis Accountants Manage Cash Flow

The cannabis industry is predominantly cash-based, making it difficult to manage cash flow. Cannabis businesses must manage their cash well, have ample accounting systems in place, and reconcile financial statements with sales. An accountant who specializes in cannabis understands the unique cash management issues that cannabis businesses face and can help you manage cash flow effectively.

It is important to note that while an accountant can help you keep your books in order (although we do recommend having a designated bookkeeper), you will need to provide them with complete and accurate records. You can assist your accountant by keeping records compliant by using cannabis-specific software such KayaPush’s all-in-one payroll software that makes HR, payroll, and employee management simple.

2. Cannabis Accountants Understand Compliance and Tax Laws

Working with an accountant who is familiar with the cannabis industry can help avoid costly fines and penalties for non-compliance. Cannabis businesses also face complex tax laws that don’t allow many of the deductions that are available to other industries. 

An accountant who specializes in cannabis can help businesses navigate these tax laws and minimize their tax liability. They can also help you understand the tax implications of business decisions while creating tax planning strategies to maximize profitability.

Some of the tax codes affecting the cannabis industry include:

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Tax Code 280E

Because cannabis has not been legalized at a federal level, cannabis businesses are forced to operate under tax code 280E. This tax code prevents the deduction of business expenses related to producing and selling illegal drugs. In other words, though cannabis sales may be legal in your state, they are not considered legal for federal tax purposes. 

This means that typical business expenses like rent, salaries, marketing, and such are not allowed. In a cannabis-based business, you can only deduct the cost of goods sold (COGS), including direct costs of producing or acquiring the cannabis products that are sold.

The implications of 280E for cannabis businesses can be significant. Without the ability to deduct most ordinary and necessary business expenses, cannabis businesses face a much higher effective tax rate compared to other businesses. This can lead to significantly higher tax liabilities and reduced profitability. 

According to Northstar Financial Consulting Group, you can save as much as 6% on your annual revenue by utilizing 280E best practices for your cannabis business. An accountant specializing in cannabis businesses can help you achieve this goal.

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Tax Code 471-3

Tax code 471-3 applies to cannabis retailers and dispensaries. This code defines the basis for what business costs can be claimed for tax purposes. It can be used to lower taxable income by carefully categorizing costs. There aren’t very many indirect costs that can be claimed as direct costs based on the wording of this regulation.

However, for cannabis retailers and dispensaries, specific transportation costs essential for procuring inventory items, along with limited production costs might be an allowable expense. This is a great example of where you need a specialized cannabis account to navigate the specifics of this tax code to minimize your tax liability, while still paying what is required to the IRS.

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Tax Code 471-11

Tax code 471-11 applies to operations that grow cannabis, isolate THC/CBD, or produce useable cannabis products. There are several ways of distributing production costs under this code. How you set up your business will determine which method your accountant utilizes to file business taxes. 

This can be pretty complicated and requires expertise to report your tax liabilities correctly, especially if you are operating as a hybrid business that produces and sells your own products, meaning all three tax codes may apply to you.

As you can see, it might be tricky to navigate such heavy regulations and tax requirements. For these reasons, it is highly recommended that you seek guidance from someone who specializes in the cannabis industry. If you aren’t sure where to look for a cannabis accountant, National Association of Cannabis Accounting & Tax Professionals is a great place to start.

3. Cannabis Accountants Help With Business Planning

An accountant who specializes in cannabis can provide valuable insight and guidance to help businesses grow and succeed. They can help companies to understand the following aspects of their business: 

• Financial position
• Areas for growth
• Business plan creation
• Evaluation of potential acquisitions or partnerships
• Risk assessment
• Impact of business decisions on financial performance

By partnering with an accountant specializing in cannabis finances, you can focus on your core operations and leave financial management to an expert. According to NACAT, you can expect to pay about 2% - 2.5% of your annual revenue for monthly cannabis accounting from a professional. While this might seem significant, it is well worth the price when you consider the ability to fully maximize the limited tax deductions, without incurring fines.

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Final Thoughts on Hiring a Cannabis Accountant

The importance of using an accountant who specializes in the cannabis industry cannot be overstated. The cannabis industry is unique and complex, with specific tax and regulatory requirements. Working with a professional who specializes in cannabis accounting can help your business navigate these challenges effectively and position itself for long-term success.