As we have mentioned time and time again the cannabis industry doesn’t always get what feels like a fair shake, after all, the tax code that affects cannabis is relatively short but it has a huge impact on cannabis business owners. This is exactly why it is important that you have an accountant who specializes in cannabis.
Redbud Advisors is a full-service cannabis accounting firm. We are trained in the intricacies and ever-changing environment that surrounds the cannabis industry. At Redbud, we spend our time and energy studying cannabis tax court cases to know what is and is not acceptable from a tax perspective. Because cannabis is not federally legal the IRS gives very little guidance which does not make it easy to stay up-to-date on cannabis tax codes, so we think outside the box.
Is it worth it to take that risk?
Just like any other specialized industry or position, you want the best possible person to fill that role. Taking a chance with an accountant who is not as knowledgeable as someone who specializes in cannabis industry taxes can potentially put you and your business at risk. Is it worth it to take that risk? We don’t think so.
You want your accountant to know the industry and more specifically YOUR business. Not all accountants or CPAs can or will do this. We have compiled a list of 5 questions you should be asking your accountant. If they do not handle these aspects of your business it is time to start looking for one who specializes in cannabis tax.
What is the cost per pound of the product we grow?
This is established through cost accounting using a cannabis-specific chart of accounts and physical count by strain because different strains yield different results. It’s important to note that cost accounting is an art and not a science. What a cultivator may produce can vary due to multiple factors - nutrients, lighting, outside environment, etc. One harvest may cost you much more to grow than it did previously. As markets mature and costs come down in competitive markets, it is extremely important to know what it costs you to grow a pound of your product.
Is cost accounting being done in my normal recurring financial statements?
Small business accountants generally DO NOT prepare financial statements using generally accepted accounting principles (GAAP). In order to properly determine the cost of your product, these financials need to be prepared on an accrual basis with cost accounting. This is because the Internal Revenue Code 471-11 says in order to pick up indirect costs, you must have recurring financial statements that are consistent with GAAP. Indirect costs, things that may not necessarily touch the finished product but are absolutely necessary to create it, can be considerable. A few examples of indirect costs are rent, water, licensing, etc.
How can you help me make money?
Using GAAP accounting we are able to strategically pick up costs that may be lost using a different method of accounting as mentioned above. If these costs can increase your cost of goods sold by 10% to 15% that is effectively putting 2% to 3% cash in your pocket because you're paying less in taxes (assuming you are taxed as a corporation). In addition to this, an accountant that is experienced in the nuances of cannabis can help identify where funds should and should not be spent. For example, entering a cannabis cup with an entry fee of 10k may not be a good investment because it is not deductible for tax purposes.
Do you know the IRS trigger that will flag your cannabis tax return for an audit?
On a cannabis tax return, there should only be three figures.
Cost of goods sold (COGS)
Typically during an audit, the IRS is looking at the cost of goods sold amount and making sure that your costs flow in/out of work in progress also known as WIP. A guaranteed flag for audit is having a high percentage of COGS.
Another issue to consider is the NAICS code classification on your tax return. For instance, currently, the IRS does not consider cannabis as farming. At Redbud Advisors we have seen the good, the bad, and the ugly when it comes to the cannabis industry. You want to always be able to put your business in a situation where if you were faced with an income tax audit you could walk away with little to no damage.
Are my books and records ready RIGHT NOW for any auditor, investor, or lender?
Having regular financial statements is key to procuring funds from any investors or lenders. How can you expect someone to lend you money if you do not know where you stand financially? Being organized is key to being prepared for an audit.
It is imperative to make sure you have policies and procedures in place to track your inventory and cash and that your receipts are scanned and organized.
If your regular accountant is not thinking outside of the box, they are not continuing to educate themselves on cannabis tax, and they are not willing to handle all aspects we listed here, then it is time to start exploring other options.
We encourage you to get to know our specialized accounting experts at Redbud Advisors for all of your cannabis accounting and tax needs. At Redbud Advisors it is our mission to help make your dreams a reality and your taxes compliant.
To get answers to your questions and expert advice you can contact Redbud Advisors here or give us a call at 866-830-5144.