Cannabis accounting is wrought with unique requirements that make it more complicated than accounting for traditional businesses. Due to highly restrictive regulations, compliance requirements, and unusual tax penalties and codes, cannabis accounting complexities plague most operators in the industry.
Consider how cannabis companies lack access to credit and tax deductions that other companies enjoy. Some changes like The Secure and Fair Enforcement Banking Act (SAFE) provide hope that some of these complications might soon end.
If you are a cannabis operator sourcing information about your accounting requirements, taxes, and overall cannabis profitability, here are a few things to know about cannabis accounting.
Go with Experienced Cannabis Accountants
With an industry as complex as cannabis, you’ll want to do business with a cannabis-specific accountant. A true cannabis accountant can protect you from fines and penalties while setting you up for business growth.
Remember that many “experienced” cannabis accountants are not that experienced. Look around and you’ll find the accounting professionals claiming proficiency in the industry but lacking the proper knowledge and experience to keep your cannabis operation compliant. These firms carry more risk with accidental errors or oversights leading to significant problems in the future.
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Ensure you’ve done your due diligence when looking for an accounting team or professional to care for your cannabis business accounting needs. Look for a trained accountant working with cannabis regulatory professionals, investors, and ancillary businesses to give you the best accounting services.
Apart from checking whether your accountant has the proper accounting credentials and certification, check and confirm that they offer services like:
- Implementation of solid internal controls
- Pristine record keeping
- 280E and COGS analysis
- Audit preparation and support
- Financial reporting and regulatory filings
- CFO and management advising
You Need The Right Accounting Tools
The biggest challenge here is that the cannabis industry is relatively new but experiencing fast growth. As a result, most of the tools in the market, from seed-to-sale software to POS systems, are not entirely excellent at managing the accounts for every cannabis operator.
Compare Cannabis ERP and Seed-to-Sale software
Cannabis operators must be discerning when choosing their accounting tools so you should invest in an industry-built cannabis accounting technology to keep processes in check and help your accounting professionals manage your taxes and books. A cannabis ERP system can even help you automate inventory management, CRM, marketing, and POS systems.
Cannabis software impacts the entire seed-to-sale process, which involves cultivating, manufacturing, distributing, and selling cannabis and cannabis products.
Dive deeper: What Does Cannabis Software Do for Different Cannabis Operators
3 Types Of Taxes
The type of tax you pay is highly dependent on your state regulations. Still, there are three primary taxes cannabis operators pay, apart from federal tax. These include the sales tax, state tax, and recreational use tax.
Sales tax is levied on retail goods, state tax is imposed on cannabis that runs as high as 20 to 35 percent, and recreational tax is levied on recreational cannabis based on the weight or the THC content of the cannabis products.
Compliance with these taxes also means remaining compliant with Good Manufacturing Practice (GMP) regulations and the 280E tax code.
You Can Get Deductions, But Under Strict Conditions
We’ve established that your cannabis dispensary is not liable for deductions. Nonetheless, the IRC 471 can help you determine the costs you can allocate to your Costs of Goods Sold (COGS) since this is the only way to earn tax deductibles.
According to the basics of 471, your inventory method should undoubtedly reflect your income and align with the inventory financials. Your inventory accounting and COGS will determine whether you get deductions on your tax. But first, your accounts must be accurate and in compliance with IRC 471.
It’s Complicated
Different states implement unique accounting regulations and requirements for cannabis companies. As long as you remain in this industry, the rules will keep changing so cannabis operators like you must know where to turn.
Don’t forget that most accounting professionals in the industry are pretty new to the market, so it helps to learn as much as you can about cannabis accounting as it applies to your corner of the market. Work with industry professionals who know how to keep you out of trouble and lean on a cannabis software solution to manage your accounting needs so you can focus on growth.
FAQs
Why is accounting challenging for cannabis operators?
The cannabis industry is filled with many regulations and compliance requirements that strain accounting processes. Additionally, the number of professionals or software solutions with knowledge and the capacity to cater to cannabis business accounting needs are minimal in an ever-growing industry.
How should a cannabis software solution help in accounting?
The best one can differentiate between deductible and non-deductible tasks and acts as a medium between accounting professionals as they manage taxes and keep the cannabis business records updated and accurate.
When is a cannabis dispensary liable for deductions?
A cannabis dispensary is only liable for a tax deduction under the IRC 471. This mandate requires some of the inventory costs to be allocated as the COGS before complying with tax deductions.
