After being in business, or even if they were aware of the tax challenges in the pre-startup phase, many subsequently become aware of this IRS tax code called “280E.”
Often it is too late.Taxes take down an otherwise healthy business.
The onerous taxes officially known as the Internal Revenue Code (IRC) 280E adds another layer of challenge to creating a successful cannabis business.When 280E is clearly understood, many realize the delusions of this supposed get-rich industry called cannabis. They quickly realize they were not being realistic.
So, when a local, state or IRS auditor arrives and/or a cannabis business is seeking investors, financial statements and taxes should have been prepared in the prior months, quarters, and years in accordance with GAAP, Generally Accepted Accounting Principles.
Scrambling to now have proper financial statements and the proper taxes filed and paid, cannabis businesses often pass the point of no return.
And, all too often the financial statements we and my colleagues see is that those financial statements have material errors.I will cover those reasons as we progress in the book.
When I field calls daily, as well as my CPA colleagues, one of the first questions I am asked is how much does it cost?
How do I respond to that question?
So, I say, “it could be $5,000, or it could be in the millions.” Silence ensues.
Then I say the real issue is not just 280E, but that you have not done your accounting properly, which means there were, and ‘were’ being the key word, many deductions that could have actually been taken but cannot be taken from the past.Going forward those deductions can be maximized.
I am going to repeat myself here intentionally. If you want to invest your entire life savings in this business you need to digest this because I see it every single day.
Seeking a cannabis professional is not like shopping at the mega-retail grocery or discount retail nationwide chains.
With the discount support many have, or the professional firm who spends little-to-no time learning cannabis, one’s financials are not done in accordance with Generally Accepted Accounting Principles (GAAP).
We can certainly ‘cleanup’ prior records, but since records are missing, which is nearly always the case, GAAP, nor does the IRS or the states, suggest we can easily apply “after-the-fact” accounting.Since this thing too called “cost accounting” must also be done to allocate certain costs to the costs of goods sold (COGS), deductions are clearly missed.Therefore, the cost accounting missed or lost in prior periods means many deductions that may be afforded under 280E are not in those prior periods.
Going forward with the proper financial records, many deductions may be realized. Also, many times I hear the response that “another CPA said I could do it this way,” or “I can’t afford to pay much so I am looking for the lowest cost CPA.”
Yes, it is true, give me 10 CPA’s, and you will get 10 different solutions. And these might be solutions based on completely not knowing that 280E even exists to not knowing at-all accrual and cost accounting concepts.
It is crucial, especially in any new industry, that CPA’s, and other cannabis professionals, are curious.CPA’s who participate with other CPA’s to discuss, debate, and to take the time required in understanding and interpreting Internal Revenue Code (IRC), state rules, and Generally Accepted Accounting Principles(GAAP), are the ones to work with.
In addition, some financial professionals suggest that one only needs annual financials for their cannabis tax preparation. We cringe often when we hear that.I and my colleagues will not just accept home-grown (pun intended) prepared financial statements.In other industries, it is fine to use typical financial statements that client’s prepared.
In cannabis, accounting is a constant assessment of rules, which change often, state tax law interpretations (another story of poorly interpreted and incorrect amounts paid), IRS interpretations and the precedents they have set in recent years.Then add the recent cannabis US Tax Court cases that are setting even more precedent, and cannabis accounting and tax is a complicated subject.
Many also do not have proper accounting controls, proper accounting data entry, proper record documentation, proper usage of the accounting rules.All of this means the financial statements are then at a material risk of not having investors, regardless of how well you grow or provide dispensary services, who want to give you money.And, then the local, state and IRS audits are atrisk too of not going as well.
Hopefullythis very introductory perspective provides insight into why the IRS looks at cannabis as a candy store for assessing additional taxes, penalties and interest.
It is why having, and spending the money, and thinking of your CPA, and your lawyer, as a beneficial part of your team, is worth it.Said another way, a Cannabis CEO must have the proper supporting cast.Your in-laws are rarely that proper support team.
If you have any query, feel free to contact us directly.