Wouldn’t it be great if this dreadful “law of the land” would just go away?!? It sure would alleviate a ton of pressure on many new Cannabis Business Owners if IRC 280e was torn up and thrown away. The reality is, 280e is here for a bit and we need to discuss it until all owners understand it and what it means for their business. I understand this is an uncomfortable topic to many owners because its confusing. However, it is also a topic that cannot be ignored. Let’s clear up some basic misunderstandings that could land you in HOT water.
As a Cannabis Business owner, you cannot just purchase accounting software and reconcile what comes through the bank feed. For a non-cannabis business this is only one step to how bookkeeping is conducted. As a Cannabis Business you need to understand what cost accounting is and how to apply it correctly to determine your cost of goods sold. You need to know and understand what costs can even be allocated to costs of goods sold. If you even have a basic knowledge of what can be allocated, do you know how to apply it or record it? These are extremely important concepts that need a thorough understanding. The smallest mistake for even the shortest amount of time can be costly.
CPA, Accountant and Bookkeeper:
If you have worked with a CPA, Accountant or Bookkeeper in a previous business do NOT assume they are Cannabis ready. Communicate with them as early as possible. Be sure they are prepared for a Cannabis client. If they are NOT, then you will need to find a professional who is cannabis ready and do so in a timely fashion. It is imperative Cannabis books are kept contemporaneously. Some expenses that can be allocated are NOT retroactive. This means if your books are NOT kept up to date throughout the entire year you will lose those non-retroactive allocations. You CANNOT just hand over Cannabis books to someone at the end of the year and expect to maximize your cost of goods sold. It is important you understand the role of each accounting team member. Contrary to what many believe, each plays an important role in your business.
I feel like this is one I will continue to repeat over and over. YOUR GOING TO BE AUDITED by the IRS. The mere fact you’re in business selling a Schedule I drug is a red flag enough to trigger an audit. If you have spoken to someone who is telling you otherwise than they are not as involved in this industry as you need them to be. Due to the fact Oklahoma has so many Cannabis Businesses the expectation is that the IRS will audit 100 percent. When you are audited, it becomes your burden to prove the IRS wrong. You need to ask yourself if you are ready to defend yourself in an IRS audit. Are your knowledge and skills, proficient enough that you can defend yourself effectively during this audit? If your answer to that question is “No,” then you need an accounting team. Even if Marijuana is legalized soon after your business opens, you can still be audited for the time 280e applied.
Cannabis Business books take a great deal of time to maintain. Not only does cost accounting apply but many have multiple entities. This means multiple accounting software accounts that need to be maintained. Cannabis businesses take twice as long, if not more to maintain than a non-cannabis business. Therefore, a Cannabis Business will pay more for this valuable investment. However, this investment will seem small when your audited and realize just how much you have saved from being a 280e prepared Cannabis Business. This does NOT mean you should not search for the most competitive rates for your accounting needs.
The earlier a Cannabis Business starts to organize and prepare their books the greater benefits they receive. Starting books from the beginning keeps records and receipts from being lost. As previously mentioned this practice also allows for max allocations to cost of goods sold. However, let’s go one step further than the obvious reasons I am sure you’re already thinking of. The longer this area of your business is neglected, the more you will pay for it to be organized. I use the word organized and not corrected because once again some expenses will not be retroactive.
Until marijuana is legalized and IRC 280e no longer applies it is imperative that Cannabis Business owners prepare for what they have gotten themselves into. I personally understand the financial struggle of opening a new business. Do NOT allow that factor to interfere with you having a consultation with a professional about your Cannabis Business. Consultations are typically always FREE and can help you understand how your business personally can be prepared. No matter what your opinion is regarding what may or may not happen in your business, this area should not be avoided. The consequences are serious and there is no relief from them. Start now by being proactive and protect your investment!