This is the second of a monthly blog post where the topic of canna-business intersects with public relations. What a pairing! My hope is that you will learn something valuable that can be helpful as you grow your canna-business. I am delighted for the opportunity to collaborate with Ernest Toney and the BIPOCann platform he’s created with you in mind—Lori Shepherd
For many more years than I care to admit to, I’ve managed PR accounts in tech, nonprofit, and many other spaces, but in cannabis I’ve discovered a riveting industry unlike any other. There’s no industry today quite like the fast-emerging cannabis industry, which is estimated to generate retail sales upwards of $52.6 billion by 2026, according to the MJBiz Factbook. With all this growth, it’s no wonder ancillary businesses, mainly accounting, are seeing a tremendous boom.
With social equity programs underway in states where cannabis is legal, Black and Brown people are getting access to business ownership; however, many social equity startup owners are so strapped for cash and overwhelmed with the daily challenges of operating their business that the need to set up Internal Revenue Code Section 280E compliant accounting operations gets lost.
The Intersection of Cannabis Businesses & 280E
This is where accountants that are particularly knowledgeable about IRC 280E compliance are crucial, and it is why they can be invaluable to supporting men and women who’ve been disproportionately affected by the war on drugs.
As a reminder, the IRC 280E regulates the taxation of the companies that sell cannabis. It requires plant-touching businesses to pay taxes on gross income vs. net income, requiring these businesses to maintain detailed financial records. The focus for setting up an IRC 280E compliant accounting operations should be considered before the business makes its first sale.
“Why is this important? Because not all businesses are treated the same,” says Angela L’Esperance, CEO of Ms. Jane Accounting, the premier all-female accounting firm based in Minnesota. “This [280E] dramatically affects all cannabis plant-touching companies. Per the IRS, since cannabis is still a federally illegal Schedule I controlled substance, cultivators, processors and retailers in cannabis are not allowed to deduct ordinary business expenses. This results in high tax rates (averaging 70% or higher) for these cannabis companies.” Angela L’Esperance says that 280E compliance begins with proper Cost Accounting booking, adequate record keeping and accurate tax reporting. “Lack of knowledge, skills and expertise in this area comes at a costly price for business owners.”
Given the complexities of the IRC 280E requirements, not to mention the difficulty new owners face when starting their plant-touching businesses, too often new licensees and other plant-touching business owners simply don’t have sufficient enough information about its importance.
The Blunt Truth About Cannabis Business Accounting
“The cannabis industry accounting requirements are both unique and complex,” said Angela Mays, a canna accountant and CEO of The Blunt Accountant based in Northern Virginia. “As a new licensee, you are concentrating your efforts on raising funds for your business, securing your location and preparing your business to open so setting up a 280E compliant accounting operation is the last thing on a new business owner’s mind.” Mays said that even before an owner opens for business, having cannabis accounting specific policies and procedures is important. She said that not having strong policies, procedures and processes in place that are IRC 280E compliant can make plant-touching business owners vulnerable to being audited and may result in inaccuracy and compliance penalties. “Canna business owners should operate their businesses as if they are going to be audited,” states Mays.
When owners don’t adequately prepare for an audit, and fail to follow IRC 280E, the result can lead to penalties and fines. The fines can be exorbitant, causing tremendous hardship for new business owners to pay them and stay solvent. The results can be crippling. But with planning and with accounting policies, processes and procedures established early on, most new licensees or plant-touching business owners who are audited, will be prepared.
“An accountant that specializes in the cannabis niche can help facilitate business growth by maintaining clear and thorough Cost Accounting records,” says Jean A. Casey, CEO of JAC Accounting, based in Phoenix, Arizona.
Auditors will look at a client’s processes and procedures. If those are in place, an auditor is able to determine the accuracy of a client’s books which can lead to a better audit experience. Without them, the auditors will assume that the books are inaccurate which can make for an unpleasant audit experience. No one wants to get audited but having an accountant that can make sure you are prepared and that understands the guidance can decrease your chances of being assessed accuracy penalties and for failing to comply with the regulations.
The path to emerging cannabusiness owners’ success is not easy, especially for social equity owners. But, as more resources and solutions are developed, it will make their journey increasingly easier.
About the Author
25SecondsPR is a communications and public relations company that specializes in helping small businesses and nonprofits shape and develop their public facing profile and brand through creative storytelling. Learn more about us at www.25secondspr.com.