What to look for when hiring a cannabis accountant

Cannabis businesses require an expert with specialized accounting training who understands the difficulties your business will face.

As of this year, 18 states and the District of Columbia have legalized marijuana for recreational purposes, and 37 states have legalized it for medicinal use. Meanwhile, federal prohibition and the associated tax laws do not allow cannabis businesses to take deductions that are typical for most entities, subjecting them to huge tax burdens that eat into profits.

This means cannabis operators cannot hire just any accountant. With cannabis still being classified as a Schedule I drug, there are a litany of challenges that come with simply operating a business in this space, making accounting even more challenging and the need for specialized training to deal with these issues necessary.

Accounting and Banking Challenges

The continued prohibition of marijuana at the federal level means many standard systems of commerce simply are not available to cannabis business owners and operators and can have huge ramifications for their business. While some banks are providing services to cannabis businesses, the deck is stacked against operators because the FDIC is not able to insure deposits like they would in most other cases.

Oftentimes, banks will also charge cannabis companies huge fees and subject them to regular audits in order to maintain their accounts, making it a huge headache for business owners just to have a way to deal with the burden that comes with having to run a cash business.

Some cannabis companies can’t even find a bank that will provide services to them. There aren’t many banks that are advertising that they will allow cannabis companies to open accounts.

Because of that, having an accountant with banking relationships is key because it is often the only way operators can get access to a financial institution so that they can do basic things like payroll or pay bills.

Even with a bank account, cannabis companies still have to accept payments in cash since merchant services are also limited or unavailable in most cases. Having an all-cash business isn’t easy. Business owners and operators can and will be held liable for missing cash and/or inventory if there aren’t detailed ledgers of every transaction going in or out of the company.

Dealing in cash means that when bills have to get paid, most cannabis operators tend to pay them in cash. So they end up having to pay for secure transport in order to pay their taxes in cash if they don’t have banking. And unless your accountant knows how to fill out special documentation, businesses are charged a penalty for cash payments of taxes. Also, when dealing with large payments in the cannabis space, transactions over $10,000 have to be reported using Form 8300.

The added constraints facing these businesses means it’s essential to have a cannabis accounting expert that can ensure compliance and proper cash management.

Point-of-Sale Concerns

The good news is that there are a number of options for cannabis point of sale solutions. The bad news is that they are often a nightmare to deal with in terms of compliance. They tend to lack crucial integrations with accounting software, making it hard to reconcile with the other systems that rely on information about sold materials.
Managing inventory is one of those areas where compliance is key. From the time a plant is put in the ground to the time that the end product is sold to consumers, it must be tracked. Having a good POS that can keep accurate inventory counts and sync with state-mandated seed-to-sale software is crucial; however, the reality is that there are often issues and inaccuracies that happen if the systems aren’t properly managed and monitored.
When inventory is way off, and isn’t fixed, typically the local enforcement agency will flag the dispensary for an audit. After repeat offenses, they can end up having to pay fines, or in some cases, getting temporary or permanent license suspensions.

Having a trained accounting professional that is closely monitoring inventory counts and making sure that they are all in sync and accurate makes all the difference and helps to keep the business compliant and local government off their backs.

Regulatory Challenges

Since cannabis isn’t legal at a federal level, there are additional regulations that businesses must comply with, whether they understand how or not. Every state and municipality have their own set of rules and guidelines, which can be extremely difficult to navigate. From human resources to OSHA to local rules on recordkeeping, labeling, disposing of materials financial reporting, etc., the list goes on and on.

Hire a professional that is actively involved in the rulemaking on the local, state and federal levels so that you are confident that your business is doing everything possible to be in compliance. Otherwise, local agencies can be quick to fine or pull licensing for negligence.

There are plenty of cases where cannabis operators and executives are being dragged into legal battles for not complying with the rules of their licensing.
There are few legal protections for negligence. In fact, in some court cases where the operators lost, fines and penalties (even imprisonment) were imposed on the operator(s) and investors as they were held personally liable even though the business was incorporated.

Investors must protect themselves and their investment and prioritize strong accounting if they hope to mitigate the risks of exposure in this industry. When things go sideways in these businesses, and they often do, authorities will look to all parties involved to be responsible for punitive damages regardless of their involvement in day-to-day operations.

Hire the Experts

So, what does all of this mean?

For starters, you’ll need a cannabis accountant who understands your struggles and has specialized accounting training.

This accountant should be an expert in regulations, being able to advise you on POS systems, recordkeeping and budgeting. They also must be able to help you manage your inventory and understand how seed-to-sale systems work. This requires being up to date on the latest regulations in the field and the various license types, how to properly navigate 280E and the various other tax codes, and how these laws affect personal taxes for investors and owners. Finally, they need to know the ins and outs of the various verticals in the cannabis world to properly help you manage these challenges.