2022 is proving to be another big year for the legal cannabis industry in the US.
So far this year, recreational marijuana dispensaries opened their doors for business for the first time in New Jersey and New Mexico. New York, Rhode Island and Connecticut are set to follow suit before the end of the year.
On top of this, Missouri, Maryland, South Dakota and North Dakota will have an adult-use cannabis legalization question on the ballot in November, with Nebraska and Oklahoma poised to join them as well.
Whether you live and work in one of these states or not, as an accountant the time is right to become familiar with this burgeoning industry.
This may seem daunting but if you have already worked with agriculture, retailers and research labs then you already have a solid basis for offering your services to a range of cannabusinesses. The most significant point of departure when it comes to marijuana is its strict reporting requirements, the patchwork of regulations between and even within states, and knowing the ins and outs of marijuana taxation.
What exactly do you need to know with regards to marijuana tax? The most important aspect to be aware of is IRS code 280E.
While marijuana may be legal at the state level, it remains federally illegal. As a Schedule I substance, that means businesses that deal with marijuana are prohibited from making tax deductions or obtaining credits for normal operating expenses, such as payroll and rent. They can only deduct the costs of goods sold (COGS).
This is a huge disadvantage for marijuana businesses but there is some scope for relief through Sec 471, especially for cannabis processors. This works primarily by leveraging inventory as a COGS. As a marijuana business owner, you should speak to an accountant with cannabis industry expertise before trying to make use of this tax code, or you could find yourself subject to an IRS audit.
This is just one example of how an accountant can help marijuana businesses maximize their earning potential. Here are a few others:
- Provide cash management advice in what is largely a cash-only industry
- Insights into advantageous business structure organization
- Setting up an accurate record keeping system
- Forecasting cashflow
- Recommend and install tech stack applications
The next few years are going to be bumpy across the cannabis industry as it moves from its illicit status. But don’t let that put you off as an accountant as there are a lot of start-up cannabis entrepreneurs out there who could do with your expertise in a market that is likely to keep growing and become even more lucrative.