Medical marijuana businesses must also vet accountants
Q: What should business owners be aware of regarding the taxation of medical marijuana?
A: The biggest issue is that the IRS Code Section 280E doesn’t allow for ordinary and necessary business deductions. The only deduction allowed is for cost of goods sold. Other normal business expenses like advertising, insurance and salaries could be completely lost if they are not accounted for properly. This lack of deductions means that ownership groups must be prepared for the potential tax liability on gross profit, instead of net profit. It’s not fair, but it is the law. Q: Can anything be done to help these businesses? A: With proper cost accounting and generally accepted accounting principals (GAAP), there is a way to allocate a portion of these normally nondeductible expenses as cost of goods sold. This is a complex system and business owners should make sure their accountant has a solid understanding of Internal Revenue Codes 471 and 263. This is a federally illegal operation and the IRS and feds are wanting to shut your doors. Stay audit-ready with solid accounting, financials and tax returns. Unfortunately, in this industry, it’s not a matter of if you get audited, but when.
Q: What should you look for in an accountant?
A: You really want an accountant that is familiar with the cannabis industry. The code section is very detailed and an accountant or certified public accountant (CPA) who isn’t versed in it potentially could cost their client a lot of money. The most complex issue is the cost accounting and most accountants aren’t equipped to handle it. In addition, most CPA firms aren’t servicing the industry due to increased liability issues, and nearly all prepare books and file tax returns on a non-GAAP basis. As such, they’re not prepared to provide adequate financial statements and tax returns to keep clients in compliance. Be sure to vet out accountants, interview several, and ask them how they plan to properly determine what your cost of goods sold are.