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Accounting Challenges for Cannabis Businesses

Jackie Tortello

February 6th, 2017

Policy, Top News

Running a cannabis business presents a number of benefits like helping patients in need and participating in a critical turning point in American history. Despite the ways the retail sale of recreational marijuana has shaped and developed a new market, it’s still not recognized under federal law and poses a number of challenges to those working in cannabis accounting or as a CPA.

Lack of Banking Access

There’s no doubt that the cannabis industry is growing. With over $28 billion generated in tax revenue during 2016, cannabis businesses are making big money, and working even harder to keep track of it. One of the biggest challenges presented to cannabis businesses is getting a bank account. Even if the retail sale of cannabis is recognized on a state level, cannabis businesses can’t deposit their money into a bank, making them more susceptible to robbery, safety threats and audits, according to a report from Leafly. By shuffling through paperwork and jumping through administrative hoops, CPAs can help marijuana businesses obtain a bank account and explain ways that large amounts of cash can be properly handled.

No Business Tax Deductions

Another challenge cannabis business face is learning and maintaining laws and regulations that are imposed on cannabis businesses by the IRS. One of those hurdles is 280 E., an internal revenue code that determines that no deduction or tax credit can be given to any business that trafficks illegal substances prohibited under federal law. Section 280E was passed by Congress in 1982 in response to a case where the tax court ruled that a taxpayer could deduct expenses relating to his sales of cocaine, amphetamine, and marijuana. Deductible expenses included the costs of packaging, travel, and even scales used to weigh the illegal substances. However, this is no longer possible in the world of 280E., according to a report from Cannalawblog.com.

As a result, business expenses like rent, advertising and employee salaries won’t reduce a cannabis business’s taxable income, unless it’s allocated as the cost of goods and services (COGS). For growers, this means costs directly related to purchasing seeds, electricity and the manpower that went into preparing the plants for sale. For dispensaries, COGS is more restrictive and usually includes the amount that’s paid for cannabis products sold, according to cannalawblog.com.

Uncertain IRS Audits

Another challenge that cannabis accountants face is surviving income tax audits. Since cannabis business are not recognized by the federal government, they are prone to audits by the IRS. While an audit can potentially shut a cannabis business down, a good CPA can give the right kind of advice and connect the business with a cannabis- friendly tax attorney.

Dealing with these Issues

A CPA working in the marijuana industry will encounter many gray areas. One of the best ways for a CPA to deal with such ambiguity is by mitigating certain risks associated with working in a business not protected under federal law. The first step a CPA should take according to a report from the American Institute of CPAs (AICPA), is presenting their client with an engagement letter that explains which services are being provided and how much those services cost. The letter needs to be signed by the client and for extra precautions, should be updated each year.

Learning about the rules and regulations for CPAs and anyone working in the cannabis industry can prevent financial failures and unnecessary confusion. It can also teach business owners about the importance of hiring a reliable CPA to manage the business’s money.

To learn more about cannabis accounting and other issues facing the industry, sign-up for our free newsletter using the form to the right.

This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.

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CFN Enterprises Inc. (OTCQB: CNFN) owns and operates CFN Media Group, the premier agency and financial media network reaching executives, entrepreneurs and consumers worldwide. Through its proprietary content creation, video library, and distribution via www.CannabisFN.com, CFN has built an extensive database of cannabis interest, assisting many of the world’s largest cannabis firms and CBD brands to build awareness and thrive. For more information, please visit www.cfnenterprisesinc.com.

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