As a lead partner in our firm’s services to the Cannabis industry clients, my goal is to help make hardworking people’s dreams come true. These days, it involves preparing companies for what may be potential stones on the road to success.
There are several unique accounting issues that affect the cannabis industry. Due to the state and local regulatory requirements, cannabis-related businesses (CRBs) need to maintain effective accounting records. Tax Code Section 280E requires attention to inventory accounting while following the tax requirements (Madison 2018). Lack of banking availability requires special attention to internal controls to safeguard cash and maintain good accounting records of cash transactions. State regulations require thorough accounting records as well as strong internal controls.
Because cannabis is a Schedule I drug, a cannabis business is subject to Internal Revenue Service (IRS) Code Section 280E which disallows the deduction of ordinary business expenses in arriving at taxable income (Internal Revenue Code 1982). That part of the Tax Code says businesses that traffic in illegal substances can’t deduct ordinary business expenses from their taxes. Apart from imposing a major extra tax burden on cannabis companies, it recently gained an even higher profile when the Internal Revenue Service added a marijuana page to its website, and inadvertently led some to a false conclusion.
The conflict between federal and state laws is problematic because cannabis-related businesses and ancillary businesses operating in legalized states and complying with all state laws are unable to fully comply with federal laws. Many cannabis businesses in states where cannabis is legal are facing difficulty in obtaining professional financial services because cannabis is still a controlled substance at the federal level (Taylor et al. 2016). This is unfortunate and we, at CFOs2Go, want to help.
Bills have been proposed that would change the federal landscape for the cannabis industry. For example, H.R. 1588, the Ending Federal Marijuana Prohibition Act of 2019 (2019), was introduced in the House of Representatives in March of 2019 and referred to the House Energy and Commerce and House Judiciary committees. There have been several attempts to pass legislation to ease the banking burden for the industry including the Secure and Fair Enforcement (SAFE) Banking Act of 2019 which passed in the House of Representatives, but has not yet passed the Senate (Secure and Fair Enforcement (SAFE) Banking Act of 2019 (2019)). We remain hopeful that ultimately cannabis will become federally legal, but that hope has not yet been realized. Accordingly, we must continue to manage the complexities resulting from the federal illegality in states where cannabis has been legalized for medicinal purposes in many states and recreationally in some states.
Like you, I love the cannabis business. Our team and I aim to help you address these challenges so you can make your dreams come true. Call us to help you prepare.
Don Hawley brings more than 35 years of comprehensive global financial and operational management experience to our cannabis and agricultural-based clients. Don has many years of experience in early-stage strategic planning, leading to well-thought-out business plans and related goal setting and management systems to achieve focused goals. His accounting, finance, and operational experiences include strategy development and implementation, company transformations, acquisitions and divestitures, financial and operational systems implementations, profitability, and cash flow improvement programs.