Marcum LLP was among the first national accounting and advisory firms to establish a practice dedicated to serving the cannabis industry.
Marcum’s Cannabis Services Group provides support, objectivity and expertise to operating cannabis businesses and those planning to enter and succeed within this emerging industry. We offer a broad spectrum of accounting, financial, and consulting services that give investors, owners, and ancillary businesses the insight they need to grow and succeed.
Top Tax & Accounting Challenges for Cannabis Operators
Marcum’s accounting, financial, and consulting services to cannabis industry operators cover the full spectrum of operational and regulatory challenges:
Accounting Systems – determination of classifications and allocations, detailed requirements to maximize allowable deductions.
Administration of Taxes Other than Income Tax – sales taxes, excise taxes, cultivation taxes, etc.
Banking – establishing relationships with financial institutions able to transact business within the cannabis industry.
Cash Flow – best practices for handling cash from an accounting and tax perspective, including required IRS reporting.
Entity Type – entity choices from a federal and state standpoint.
Industry Differences – cultivation, manufacturing, distribution, retail/dispensary, other ancillary businesses.
Internal Control Structure – development of proper internal controls while keeping in mind efficiency and company structure.
Inventory & Sales – proper accounting policies and procedures.
Legal and Operational Structure – choices to maximize flexibility and to comply with federal, state, and local laws, including licensing.
Tax Planning for Business Expenses (IRC §280E) – separate businesses, maximizing cost of goods sold.
- Operation and Regulation Services
- Ancillary Business Services
Marcum’s Cannabis Services Group is established in major markets throughout the country, including numerous states where cannabis has or will become legal for both medical and/or recreational use. Marcum is also licensed to operate in Canada.
Services encompass every aspect of operation and regulation:
- Audit and assurance (both GAAP and IFRS)
- Business structure
- Cash flows, forecasts and projections
- Compliance and internal controls
- Forensic and litigation support
- Investigative due diligence
- Mergers and acquisitions
- Specialized consulting
- Tax and planning under IRC section 280e
Services extend to all ancillary businesses supporting the cannabis industry, including:
- Cultivators and cultivation suppliers
- Delivery providers
- Waste management
Issues Unique to the Cannabis Industry
In addition to the customary business challenges faced by any company in an emerging industry, operators in the cannabis industry must contend with the unprecedented challenge of conflicting legal parameters at the state and federal levels. The issues confronting growers, distributors, retailers/dispensaries and other ancillary services are complex and include:
In addition to “Knowing Your Customer,” which is required by all financial institutions, any entity doing business in the cannabis space is required to meet certain anti-money laundering criteria including, but not limited to, accounting for cash deposits, having a record of customers, tracking mass shipments to suppliers, and maintaining a record of any red flags which might occur during the business’s normal course of operations.
Limited sources of capital are available to operators in the cannabis industry because many financial institutions’ underwriting requirements preclude investing in cannabis.
Including restrictions on the deductibility of expenses under IRS section 280E, which can impact cash flow significantly. Items normally standard as cost of goods sold will be subject to IRS scrutiny, such as employee salaries, utilities, marketing & advertising, routine repairs and maintenance, rent, insurance, and payments to contractors.
Under Internal Revenue Code Section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” Although limited in size, this section has a dramatic impact on the taxability of net income and the ultimate profit generated by any entity operating in the cannabis arena.
Every state that permits cannabis operators has ultra-strict guidelines to monitor the operation “from seed to sale” and at each mile marker along the way. Operations require comprehensive systems that allow growers, distributors, retailers, and others to account for all of their revenues and expenses, in addition to the product itself. Even as the cannabis industry accelerates, there remains tremendous uncertainty in the marketplace and changing rules at every level – state, county, and municipal.
Companies doing business in the cannabis arena are required to have extensive security procedures relating to background checks for all current and future employees, Board members, and other stakeholders; safeguards against theft; and procedures to monitor the production and sale of product. Industry operators must be prepared to develop, implement, and annually document all security measures, including video surveillance, record maintenance, and a host of others. The regulations are complex and continuously changing, with states promulgating new rules on an ongoing basis.
Under their federal charters, many financial institutions are unable to accept dollars earned in the cannabis industry, and many of these same banks have begun closing the accounts of long-time customers that have chosen to get involved in this new industry.
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