Since Washington and Colorado legalized recreational cannabis almost a decade ago, the industry has grown at a staggering rate. Even so, cannabis commerce is still emerging and faces unique challenges due to legal considerations. Cannabis companies often lack the support they need to thrive, especially when it comes to cannabis accounting, payroll management, tax administration, and finance.
With the cannabis industry expected to rake in $100 billion by 2030, it's important to set your business on a trajectory of growth. If you're looking to broaden your market and expand your team, but are still struggling with accounting challenges, it's time to create an actionable plan that works.
One of the best ways to assist your accounting team is partnering with a reliable professional employer organization (PEO) that offers robust HR assistance. Here are some of the most common accounting difficulties that cannabis companies face, and tips to overcome them.
The 3 Biggest Cannabis Accounting Challenges
Despite cannabis being legal for medical or recreational use in more than half of US states, marijuana is still not legal on a federal level. This means that cannabis companies often run into roadblocks when trying to accomplish things that a business needs to thrive. Here are three of the biggest accounting challenges that cannabis businesses face.
1. Cannabis Tax Laws
Cannabis tax laws vary by state, with seven U.S. states taxing cannabis sales. These sales can be taxed as a percentage of the purchase, based on the weight of the product purchased, or based on the potency of the product. This means it's important to understand every aspect of cannabis tax laws to ensure that all tax documentation is accurate.
2. Audit Preparation
Cannabis businesses are more likely to be audited due to the status of cannabis taxation within the federal government. There are many reasons why your business may be audited, and it can be tough to understand exactly what the IRS is looking for when tax time comes. Because the likelihood of an audit is higher, it's best to be prepared for an audit to happen instead of scrambling at the last minute.
3. Industry Expertise
Because the cannabis industry is still maturing, it can be tough to find cannabis-specific vendors and partners who truly understand the unique obstacles of the industry. Businesses need accountants, bookkeepers, payroll professionals, tax specialists, and other financial experts. Depending on where you're operating, some third-party vendors, partners, or experts may even refuse to work in the cannabis industry.
3 Cannabis Accounting Tips You Can Use Right Away
Whether you're just starting out in the cannabis industry or you're an established business, it's still important to be conscious of new developments in the ever-changing industry. Each of the challenges listed above can be negated using some of the following tips.
1. Master the IRS 280E Tax Code
There is a specific section of the tax code that you can look into to learn more about how to keep your cannabis business compliant with the IRS. Section 280E of the tax code was created to prevent drug dealers from claiming business expenses for tax deductions. Even cannabis businesses that are state-legal are still technically illegal federally, so section 280E applies to all retail companies that sell cannabis.
Because of this, you'll be taxed at a higher rate. But to offset some of those higher rates, it's important to look at your cost of goods sold (COGS). COGS is an accounting term that describes the expenses you incur when you produce the products that your company sells. So, as a cannabis infusion company, if you manufacture your own products, you may be able to deduct some items from your taxes. There is also an opportunity to maximize your 280E tax deductions as it relates to your workforce.
It's important for any business to keep careful track of all expenses and financial records, but it's especially important for cannabis businesses. It can save you money when paying your taxes and save you from a headache if you are audited.
2. Nail Your Inventory Management Process
It's essential to have an inventory management system that works well for your business, including a cannabis-specific point of sale system. Take inventory regularly to make sure that your products are moving at the proper pace, and monitor inventory-related key performance indicators like inventory turnover rate, gross margin per product, and how many days it takes to sell products.
When you know all this information, you can streamline your cash flow, make smart purchasing decisions based on what your customers like, and stay legally compliant.
3. Partner With Cannabis-Specific Professionals
As mentioned above, it can sometimes be difficult to find experts to work with, especially because your business is sometimes considered to be in a legal gray area. But more and more, third-party vendors and financial experts are starting to cater to the cannabis industry.
When selecting payroll providers, HR teams, and PEO solutions, look for experts who are already well-versed in cannabis.
When you choose to work with industry experts, you can rest assured that they already understand the hurdles you're facing and can help you overcome them. This will make your job easier, save you money, and keep you protected from tax compliance problems.
In addition to working with cannabis experts, choose cannabis-specific software that lightens your accounting responsibilities. As the cannabis industry continues to grow, you'll find more software that caters directly to your needs.
Prepare Your Accounting Team for Success
Cannabis laws are constantly changing in the U.S., so if you're in the cannabis business, it's important to stay on top of all the necessary legal aspects. This will not only help protect you from any legal trouble, but it will also help you grow your customer base and expand your footprint.
Oftentimes, your accountant is tasked with many of these responsibilities and needs all the assistance possible. Partnering with a PEO is one of the most important things you can do to set your accountants up for success, increase your cash flow, and stay ahead of the curve.
If you're looking to work with experts in the cannabis industry to help manage your finances, Teamployer is here to help. We offer the tools and flexibility you need to reduce your audit risk, save on HR administration costs, and grow your business quickly. Contact us today to learn more about how we can help you reach your business goals.