Cannabis business owners are much more likely to encounter scrutiny from the IRS as a result of onerous tax demands and the conflict between state and federal laws. Staying compliant and being prepared for worst-case-scenario IRS audits is a crucial risk management procedure for protecting your cannabis business. Adding to this potent mix are the operational and regulatory complexities of operating in this fast-growing industry. That’s why it is of essential importance that cannabis operators choose the right cannabis accounting firm, outsourced/fractional CFO provider, and bookkeeper.
With a dedicated cannabis CPA on your side, you receive value-added service based on a solid foundation of accounting principles for the unique risks and opportunities associated with operating a business in the cannabis industry. In the following, we’ll provide questions to ask when you’re looking to engage the right cannabis accounting firm to support your business as it grows.
What does a cannabis accountant do?
In a nutshell, a cannabis accountant is a financial professional responsible for maintaining and analyzing financial records. They should know the unique tax laws, financial regulations, and business trends affecting the cannabis industry. A cannabis accountant should provide experience in managing cannabis business profitability and stay current with changing legislation affecting the industry.
Since the tax laws in cannabis are so complex, a cannabis accountant’s first responsibility is likely to be tax planning and compliance. This is much more involved than simply filing taxes on time (although that is very important!). A good cannabis tax accountant will help you plan your tax position throughout the year. They’ll optimize your business structure to avoid over-taxation, track expenses, and help generate documentation supporting your Cost of Goods Sold (COGS). And when tax deadlines come, they’ll make sure your returns are filed correctly, on-time, and you’re avoiding IRS red flags.
As your cannabis business grows, a good cannabis accountant will provide additional services that help you understand your financial and operational performance. They’ll help produce financial reports that will help you optimize revenue and profitability. And when you plan to undergo a major transaction, like an M&A deal or a capital raise, they’ll make sure your financial reports are top-notch, your operation represents its value, and you’re protected from liabilities.
Ultimately, a good cannabis accountant will help support all things financial and operational as your cannabis business grows.
What to look for in a good cannabis accountant
The following are key characteristics to look for in a good cannabis CPA:
- Experience working with all cannabis verticals, and structuring vertically integrated operations.
- Current clients in each major cannabis market, so they have up-to-date information on the latest laws and regulations.
- Dedicated cannabis professionals, so your engagement team is delivering value and you’re not wasting time teaching them about the cannabis industry.
- Complementary suite of services that build on each other, so you get the support you need as your cannabis company grows and enters new markets.
- Tactical expertise with cannabis-specific operational challenges, like managing large amounts of cash
- Robust network of cannabis service providers, so you can access capital, implement leading technologies, get bank accounts, etc.
- Cannabis tax expertise, so you avoid any issues and gain a competitive edge with advanced tax planning capabilities.
Why are optimal accounting practices so important for cannabis businesses?
Due to the status of cannabis on the Controlled Substances Act and quickly changing legislative rules, cannabis shops must maintain proper accounting records. While Tax Code Section 280E currently prevents state-legal cannabis businesses from deductions of most business expenses, an experienced cannabis tax provider can show you ways to be eligible for deductions by segmenting costs under Cost of Goods Sold (COGS). Determining COGS can be challenging, and there are often a lot of gray areas where you may need expert advice to handle correctly and stay compliant with IRS and GAAP guidelines. Because of the complicated steps to filing taxes and creating a financial system properly, we recommend you find an accountant who fully understands the full scope of the cannabis industry.
When do you need to hire a cannabis accountant?
Considering maintaining tax and regulatory compliance is a necessary condition of holding a cannabis operational license, it is recommended you work with a dedicated cannabis accounting before you launch your cannabis business. The sooner you access cannabis tax and business planning expertise, the sooner you’ll enjoy the cost-saving benefits.
Key timing factors include:
- Are there recurring financial tasks taking up a lot of your time?
- Are you confident with your internal team’s ability to prepare and file cannabis taxes?
- Are you planning to raise capital or undergo an M&A transaction?
- Are you prepared for an IRS audit?
- Is your business currently profitable and ready to grow?
If the answer to any of these questions is “no” you’re ready to bring on a cannabis accountant!
Questions to ask a cannabis accountant
Here are some questions to consider when interviewing cannabis accountants. Keep in mind; some firms will have additional costs and services to consider. When making your decision, consider the well-being of the entire business based on profitability, compliance, and future growth.
1. How long have you been serving cannabis clients?
Not all accounting firms are the same. Some specialize in cannabis operations, whereas others are new to serving the cannabis industry. Why is this a problem? Cannabis businesses are subject to unique rules and regulations. Your business deserves a dedicated financial professional who can make recommendations based on the specific needs of your industry. In recent years, a lot of larger accounting firms have been starting cannabis practices to try to jump on the bandwagon. But what often happens is that engagement teams get assigned to cannabis clients from other industries and they don’t have focused industry expertise. When this happens, you end up paying more for less, as they aren’t bringing added value and YOU may end up teaching them about the specifics of the cannabis industry.
For example, at GreenGrowth CPAs, we specialize in working solely with cannabis businesses. We stay current with changing legislation and tax laws that affect the cannabis industry. We have nearly a decade of operational and financial insight that fuels our processes and standard operating procedures. Firms like ours deliver value on Day 1, so you’re not wasting time or money..
2. How do you help your clients navigate 280E?
If an accounting professional has not set up your business financial system, you’re likely missing opportunities to limit tax exposure and maximize profits. Ask the accountants you interview about their experience navigating 280E rule. Many general accountants are inexperienced at navigating section 280E, and their answer to this question will give you insight into their experience level and ensure they are well versed. For more information on how the IRS Code 280E affects tax payments for cannabis businesses, check out our recent article, where we dive deep into everything you need to know about reducing taxes and maximizing profits.
3. Do you have experience serving clients like me (start-ups, vertically integrated operations, multi-state operators, dispensaries, etc.)?
The cannabis market is one of the fastest-growing industries today. By 2026, economists estimate its worth to be over $90 billion annually. The competition is hot, and as your business continues to grow, you want an experienced accountant who has worked with cannabis businesses at every stage and in every vertical. A solid financial team will help your business be ripe for expansion and growth and avoid more cumbersome processes later on down the road.
You’ll want an accountant that serves every type of operator at every stage of growth. That way you know they’ll provided experienced guidance as your company grows and your operations expand. For example, aAt GreenGrowth CPAs, we serve more than 600 cannabis clients and have a footprint in each legalized state. We’ve had the privilege of representing cannabis businesses in every vertical and from every business stage. Our advisors are well-versed in handling cannabis businesses regardless of size. They know how to help the business owner plan for future success and sustainable growth while maintaining compliance with all industry laws and regulations in your state(s).
4. How do you charge and meet with your clients?
Accounting services can vary significantly in cost and billing cycles. As an operator, it is essential to remember the age-old saying, “you get what you pay for” when choosing an accountant. While many things can be fixed and refiled, it ends up costing the business owner in the end. The stress and extra costs associated with paying another firm to redo incorrectly done taxes, audits, etc., fall on the business owner. Paying someone more to do it right the first time may be more costly upfront, but it usually comes with fewer headaches with the IRS and fewer bills down the road.
You’ll also want to understand the accountant’s procedures for meetings. You don’t want someone who never checks in or seeks to understand your business. You’ll want regularly scheduled meetings so you’re getting value-added advice throughout the year, and not just during tax season.
5. How can you help me better manage my cash flow?
Cannabis business owners should use this question to identify areas for improvement in their operations. It also provides a good discussion around the accounting firm’s experience and how they have been able to help other cannabis businesses with specific financial practices.
For instance, we see inventory aging and accounts receivable as two common issues often needing improvement in most cannabis shops. We often implement ASC 606 and account for revenue from contracts using GAAP. In addition, we also evaluate your current revenue policies and develop customized strategies to build transaction-level income and defer revenue sub-ledgers. Moreover, we assist with technical memos and necessary journal entries while evaluating the impact of regular and convertible debt to ensure sustainable growth practices. An experienced cannabis accountant should have ready solutions to help you with these fundamental operational needs.
6. What other services can you offer my cannabis business?
Asking about additional services and partnerships is always a good idea for creating your business accounting and financial team. It’s also another great reason why working with professionals who specialize in the cannabis industry is crucial. For many cannabis operators, it makes the most sense to have the same CPA firm performing accounting, tax and other financial services. There are operational efficiencies to be gained, and your accounting firm should be offering discounted service rates for packages as a result.
You’ll also want to know that your CPA firm is ready to grow with you. For example, at GreenGrowth CPAs we do everything from helping set your business up for success, to guiding you through a cannabis IPO. We are positioned to deliver value throughout the cannabis business lifecycle and grow right alongside you. Local accountants are unlikely to have the full scope of services. Whereas big national firms won’t be interested in working with you until you’ve reached a certain size, as they only work with “big” clients.
It is best to find a cannabis accounting firm willing to support you through every stage of your growth.
Best practices for choosing a cannabis accountant
In well-established industries, accounting firms can’t offer much that differentiates them. But cannabis has such a specific and highly-regulated marketplace that there is little to no room for error. It is best to engage a cannabis-focused accounting firm at the outset so you have experienced guidance from the very beginning. While it may be tempting to save money and try to manage everything yourself, it is best to let experts handle the complex financial and tax stuff, while you focus on doing what you do best: growing your business. To see how we can help your cannabis business, schedule a free consultation or contact us at 1-800-674-9050.