6-minute read
As a professional in the cannabis industry, no doubt you know that there are many extra hoops you must jump through to achieve and maintain legal compliance. Bookkeeping and financial reporting requirements are no exception. So, using the services of bookkeeping experts with experience in the cannabis industry is a smart move for your small business.
Legislation has been slow in welcoming CRBs. Fortunately, some recent legal changes have given cannabis-related businesses more access to professional service providers like Certified Public Accountants. Let's look at some convincing reasons CRBs should take advantage of this encouraging move forward and outsource their accounting and bookkeeping tasks to the professionals.
Cannabis-Related Business Bookkeeping and Financial Reporting Hurdles
The many discrepancies between federal and individual state laws regarding cannabis make running a small business in this industry quite challenging.
Business Expense Deductions
U.S. Internal Revenue Code 280E prohibits marijuana-related businesses from claiming business deductions and credits because the federal government continues to categorize marijuana as a Controlled Substance. However, in late 2020, the IRS published a relevant notice. Many CRB owners now believe that using a cost accounting method and applying IRC IRC 471(c) regarding their inventory allows MRBs to use cost of goods calculations to reduce gross receipts.
Note that this provision applies to cannabis businesses that generate less than $25 million in gross receipts each year. Plus, your small business must follow some very strict guidelines to take advantage of the cost accounting method. For example, when you change your business accounting method, you must get approval from the IRS. Additionally, the IRS has stated that marijuana dispensaries cannot deduct certain expenses, such as advertising. That means you can't just claim that your marketing and sales costs are part of inventory costs.
Can your cannabis small business expense all your inventory under IRC 471(c) and avoid the 280E business deduction ban? These are the types of complex tax questions that only an accounting professional should address. Without this skilled guidance, you may find yourself in very hot water with the IRS.
More Inventory Issues
Accurate inventory in the cannabis industry can be overwhelming. Are you producing some of your own inventory with cultivation? Will you be using Direct Material Inventory methods, Work-in-Progress Inventory practices, or some combination of the two? While growing cannabis, your organization consumes a portion of the inventory that you procure. You may need to roll those costs into the manufacturing process. With WIP inventory, you're accounting for rent, labor costs, utilities, depreciation, and a range of other related expenses.
Accuracy in these accounting tasks is essential. Your forecasted and current costs are instrumental in many of the business decisions you need to make. Errors, misleading data, and unfounded information can spell disaster for your company.
Generally Accepted Accounting Principle (GAAP)
GAAP outlines standards in the accounting industry that businesses must follow regarding accountant-prepared financial reporting statements. The Financial Accounting Financial Board designed these principles to support consistency, accuracy, and the provision of useful financial information. Familiarity with GAAP isn't universal. Knowledge and application of these concepts calls for an acquired skill set that's valuable to CRBs.
Complexity of Applying Accounting Methods to Different Operators
Many cannabis businesses perform more than one function as they oversee most of the supply chain, covering cultivation, manufacturing, and retail. Business accounting is not one-size-fits-all. These multi-function CRBs require different accounting methods.
Retail accounting deals with product costs but not labor or overhead. Agricultural accounting handles the non-value of growing cannabis plants and the calculations on yield. Meanwhile, manufacturing accounting doesn't apply inventory costs for inventory quantities. These distinctions typically pose difficulties for those untrained in accounting and financial business record keeping.
Effective Accounting Software Tools
Technology is booming, and tech advancements are plentiful. Yet, once again, legal roadblocks have caused problems. As cannabis moves further into the legitimate market, more software solutions will come available.
Right now, cannabis software is still in its infancy. That makes accounting and bookkeeping software for CRBs problematic. They're not intuitive for the layperson. Instead, you're far better served with industry specialists who understand how to apply premium accounting tools to the cannabis industry.
A Few Words About Hemp - the Other Cannabis sativa L. Plant
If you're operating a CRB that deals with hemp production, manufacture, and/or retail, you may assume that you're in for a smoother ride than marijuana-related businesses. While the 2018 Farm Bill loosened many legal restrictions on hemp, difficulties remain. You still have to deal with complicated tax codes, farm accounting, cost accounting, inventory policies, software deficiencies, and other challenges. That said, the federal legalization of hemp provides benefits. Just be sure that you're in full compliance regarding your financial record-keeping and bookkeeping. An accounting industry expert can make all the difference.
These are merely a few of the complexities you are likely to encounter when attempting to manage accounting, bookkeeping and financial reporting for your CRB. Turn to AccountedFor to better understand how our skilled professionals can help you navigate the cannabis industry's many legal bookkeeping requirements.