By Liz Gold
There’s no denying it – cannabis is hot and more people (CPAs included) are jumping in to be part of the Green Rush.
MORE ON CANNABIZ: CPA Takes His Cannabis Practice on the Road | Moving Beyond 280E: Dean Guske on the Cannabusiness | Cannabis Lights Up Midterm Ballots | Squar Milner Takes on Cannabis in California and Beyond | 4 Best Things About Being a ‘Dope’ Accountant | 5 Biggest Mistakes Cannabis CEOS Make | Five Secrets to Launching Your Own Cannabis Accounting Firm
Exclusively for PRO Members. Log in here or upgrade to PRO today.
November’s midterm elections proved that people across the country are in support of legalizing cannabis – in some fashion – bringing that number up to 33 states that have some measure of access to cannabis. According to NORML, so far in 2019, there are nine states with pending legislation to legalize adult use cannabis – including Vermont, New Jersey, Illinois and Washington, D.C. Legalization for medical use is also under way for four states – South Carolina, Tennessee, Indiana and Texas.
In addition, a number of states, including Illinois, Michigan and New Hampshire, are looking to grant expungements to those with past marijuana convictions. These numbers are changing every day.
But what is ahead for the business side of the fast-moving industry? We asked a few cannabis CPAs what they see in store for cannabis businesses – and the accounting professionals who work with them.
“The new Congress and new proposed bills will likely have a big impact. Just as hemp was legalized, I think we will see new federal legislation around the R&D rules and banking related to cannabis, as these are both non-controversial issues – and bipartisan – that need to be addressed as soon as possible. Most in Congress get that, including Treasury Secretary Steve Mnuchin and President Trump.
“Wild swings in commodity prices vary significantly by state. For states with many licenses such as Oregon, you get massive oversupply and very low price compared to limited states such as New Jersey. Until state lines come down and national price can be created, we will have wide price differences, which simply encourages the black market to continue. For example, bankrupt farmers in Oregon will want to ship to the east coast to stay afloat.”
The number one best practice he tells his clients: “Strong accounting! This means perpetual data room – all records, financials, legal documents, etc. are investor/lender/auditor ready, any time, all the time. Backup/support documents for all transactions, correct GAAP/cost accounting, compliance with all state, federal and other regulatory bodies.”
New emerging trends among CPAs: “Many are now finding they have a cannabis client before knowing anything about the industry, such as Oklahoma with 2,500 new companies. More CPAs are wanting into the space, as well as bigger firms. Cannabis is becoming more and more mainstream, more people want in, and the movement is rapidly gaining steam. It’s not a ball rolling downhill anymore, but think a boulder falling off a cliff with no stopping it.”
General trends impacting cannabusinesses in 2019: “In 2018, a majority of the U.S. cannabis industry invested heavily on building infrastructure and regulation into their businesses to scale for 2019 and beyond. According to Viridian Capital Advisors, cannabis companies raised more than $13.8 billion and there were more than 300 merger and acquisition deals inked across the industry.
“In 2019, we will continue to see cannabis operators fundraise to scale operations and build their business infrastructures. Cannabis operators should begin to see positive cash flow as the market continues to stabilize. With the passage of the Farm Bill, we will begin to see what the hemp sector has to offer, and how many cannabis companies will venture into the CBD market.
“We will continue to see more mergers and acquisitions on both the cannabis side as well as ancillary side of business as more mainstream corporations begin to explore opportunities in the cannabis industry.”
The number one best practice she tells her clients: “Knowing your numbers is a fundamental precept of business. It is essential for every business owner to have a firm grasp on their numbers, analyze their numbers and make strategic decisions based upon their numbers. Clients in the cannabis industry should be analyzing their weekly cash flow, best-selling product, product contribution margin and over overhead expenses.”
New emerging trends among CPAs: “CPAs are becoming more knowledgeable about regulatory compliance to help better serve their clients. CPAs are helping their clients navigate cannabis regulation through performing risk assessments for clients, establishing internal controls to mitigate risk, and developing effective monitoring and communication tools to implement through the entire organization.
“CPAs who are emerging into the cannabis industry should brush up on their cost and inventory accounting as well as accounting for leasing and revenue recognition.”
New emerging trends in the cannabis industry: “The product innovation in the cannabis industry is beyond impressive – from new consumption techniques and devices to a better understanding of the cannabis plant and its many components, we are seeing an overall trend in consumer education, branded products, as well as consumer experiences. I believe that we'll start seeing more events and consumer experiences that push the boundaries of traditional cannabis consumption. I had the opportunity to help a client win one of eight licenses for the first-ever consumption edibles lounge in the City of West Hollywood and recognize that we are just in the beginning of something revolutionary.”
New emerging trends in the cannabis industry: “I expect to continue seeing mergers and acquisitions. A lot of the smaller grows are finding the taxes to be so burdensome (excise tax and income tax) that they can't survive. Extraction and hemp grow businesses are looking good, especially as hemp has been legalized. I think we'll see dispensaries trying to differentiate themselves from competitors, e.g., becoming a ‘boutique.’ Ancillary businesses (equipment, insurance, accounting) have the most potential to be successful because they can better obtain banking, don't have the same overtaxation issues, and there is a high demand for their products/services.”
Recommendations for cannabusinesses: “Don't fall behind on obligations, budget cash flow and don't be cheap. It's worth paying a lawyer and a CPA in the beginning so you understand what your obligations are and plan your cash flow appropriately. Potential clients often come to us after they became tight on cash, fell behind on paying payroll taxes, then fell behind on paying their service providers, such as bookkeeper/payroll processor/CPA. Next thing they know, it's been six months and they are looking for a new firm, not realizing the mess they've created will be much more expensive to fix.”
New emerging trends among CPAs: “I haven't seen many new CPAs in the industry. In my experience, established firms have enough work without taking on marijuana clients that they prefer to introduce a potential client to an industry CPA versus taking the work on themselves.”
Best practices he tells his clients: “There are two things that are extremely important for those clients in the cannabis industry. The first: It is critical to develop internal controls. The cannabis industry typically transacts most its sales in cash since many credit card companies and financial institutions are not servicing the industry. Therefore, it is imperative that an entity is able to account for all transactions from both the sales and the purchasing cycles.
“The second best practice is to maintain proper records for all aspects of the business. Currently cannabis is considered a Schedule I substance under the federal guidelines; as such cannabis companies are required to follow Section 280E of the Internal Revenue Code when reporting their revenues and expenses on their tax returns. This section of the code requires taxpayers to adhere to strict guidelines, which allow only limited deductions. There are various situations where proper tax planning can minimize taxes and provide clients with a potentially significant benefit.”