6 Priorities for Your Cannabis Business
by Brian S. Whalen, CPA January 20, 2019
Estimated Reading Time: 3 minutes
Get Your Priorities in Order
The cannabis industry is the fastest growing, most rapidly changing, overly complex industry in America. Business by business, town by town, county by county, and state by state, the rules and regulations differ. You need to maintain a questioning attitude; ask yourself what might bite you in the rear and seek a solution before it does. The goal is to always be compliant and audit-ready.
The following should be among your top priorities:
- TIMELY FILE YOUR TAX RETURNS AND PAY YOUR TAXES! – All of them! Federal and state income taxes, local taxes, sales, and use taxes, cannabis excise taxes, self-employment taxes, payroll taxes, etc. There are cannabis folks who didn’t, including one we know of who is in a federal prison cell at the time of this writing for willful failure to file a tax return. Individual returns are due in mid-April, but six-month extensions are an option. Just keep in mind that if you owe the IRS, the extension doesn’t grant you extra time to pay. If you owe the IRS, penalties and interest start on the due date regardless of any extension. Partnership and corporate returns are due in mid-March and are also extendable. If you are beyond these deadlines, get your taxes prepared before the IRS sends you a letter, calculates your tax liability for you, fines you, and tacks on interest (although fines and penalties may still apply).
- PAY YOUR FAIR SHARE OF TAXES, BUT NO MORE! – This is straight out of the Taxpayer Bill of Rights. Your cannabis accountant may claim to be maximizing your deductions under § 280E, but how do they or you know if they really are? Have 10 CPAs do your tax return and you’ll probably have 10 different calculations of your tax liability. As my seasoned Bentley University Tax Attorney Professor (he did Mergers and Acquisitions for Bob Kraft of Gillette/ New England Patriots) said, “I don’t know why they call this program a master’s in science, it should be a master’s in art,” insinuating that applying the tax laws is more art than science. That’s right; the interpretation of the tax code often lies in the eye of the beholder – and the beholder is the IRS or the U.S. Tax Court if you want to get aggressive and go that far. Given the unique obstacles of the cannabis industry (§ 280E combined w/ extra state and local taxes/ excise taxes), the difference between $100,000 in profit and break-even for a dispensary doing $1,000,000 in sales can come down to how your tax artist paints the accounting landscape. Painting within the lines (the law) is a must, but not all paint-by-number portraits are the same.
- DOCUMENT, DOCUMENT, DOCUMENT! – Good record keeping is paramount in an emerging industry that is under the microscope. You will need to substantiate your expenses and document methods of allocating costs to your products. You will need evidence that you have all required policies and procedures in place, and that you adhere to them. You will want to have everything relevant to your business in a single directory, so your information is readily available when you wish to provide it to investors, lenders, or auditors. Proper documentation is a must if you are going to produce accurate financial statements necessary to source funding, minimize taxes, make managerial decisions, and ultimately sell the business
- COMPLIANCE – Don’t risk your license by failing to comply with regulators! The State, IRS, and other local and federal government agencies hold the keys to your operation and can shut it down in an instant for noncompliance.
- CASH FLOW – Keep an eye on your cash flow. If all your cash is tied up in inventory and you can’t pay that electric bill, your next crop may be at risk. The electric company doesn’t care if you have $3 million worth of flower sitting with a distributor.
- CONTROLS – Auditors and investors may look to your “internal controls” procedures to gauge the likelihood that your financials are accurate. With proper controls in place, there is a much greater chance you will have a profitable business. The bonus is that you will know within reason that you are not being embezzled.
Tags: § 280E, 280E, Business, Cannabis Business, Internal Controls, IRS, tax