Most entrepreneurs have their hands full with the basics – finding a product or service which adds value to their customers, managing the fulfillment or distribution part of the project, marketing and sales, engaging colleagues, collaborators or employees and then figuring out pricing that generates a profit opportunity. For most startups, the last piece, figuring out the profits, is assumed to be simple math. Yes, profits and cash flow are critical to the survival of the enterprise, but the bookkeeping, accounting and finance are assumed to be straightforward.
Most people look at the revenues, subtract the costs and find the profit – and assume any bookkeeper can give them the answer. Savvier business people will look at revenues, subtract targeted profits and manage towards their “allowable cost” goals, but again assume a bookkeeper can give them the information they need to solve for the answer.
The challenge for the cannabis industry is two-fold. First, many of the participants come from non-traditional business backgrounds. The black market was cash based, and people destroyed their records. The black market lacked sophisticated accrual accounting. The legal market is also cash-based, which brings unique challenges.
But even new entrants, with traditional business background, are caught unprepared for the complexities of 280E. (Paraphrasing the IRS code known as 280E: Traditional business expenses are often not deductible by a business whose activities are illegal under Federal or State law.)
Naturally, they turn to accountants, only to discover that in most of the 23 states which allow marijuana as a medical treatment for certain conditions, CPAs are quite ambivalent. Other professionals have it easier. Consider:
Physicians – States with medical marijuana laws provide clear guidance for physicians as to which conditions qualify and how to prescribe cannabis.
Attorneys – Their rules of professional conduct do not allow them to engage or assist a client with conduct that is criminal, but they can discuss the legal consequences of a proposed course, and make a good faith effort to determine the validity, scope, meaning or application of the law.
Certified Public Accountants are held to a different standard. They are ethically prohibited from helping clients break the law. Most state boards of accountancy have taken a “wait-and-see” approach when it comes to issuing guidance for CPAs offering services to marijuana businesses, with Oregon and Washington State Board’s offering a tepid “we will not take action against a CPA or CPA firm that elects to provide services to a state-legal marijuana business simply for providing services to that business.” This link will take you the American Institute of CPA’s issue brief on the CPA profession and Marijuana laws.
Entrepreneurs generally have a background in sales or operations. They want to make things happen and have a positive impact in their community. They do not want to spend any time thinking about bookkeeping. Accounting is typically is that last thing they want to think about … but for cannabis entrepreneurs, it needs to be front and center in your business planning.
Accounting, using 280E, radically distorts conventional profits and taxes. Before launching your company, be sure you have advisors who will be there to support you.
In the near future, a colleague and I will be formally establishing a bookkeeping firm which focused on providing accounting and financial services for two purposes:
Financial Records needed for compliance with state regulations (especially California's Medical Marijuana Regulation and Safety Act, or MMRSA) and the documents your tax accountant will need.
Financial tools and insights to improve the profitability, efficiency and cash flow of an existing business, and financial models to anticipate future funding needs.
Please click on the Green Box at the top "E.P. Blog" to see my other articles. I work with cannabis business owners, sharing insights they may not find elsewhere.
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