Cannabis Accounting | 4 Tips From an Accounting Professional

October 25, 2021

Recently, we sat down with Zachary Gordon, a professional cannabis accountant, to ask him everything dispensary owners need to know about cannabis accounting.
His tips were incredibly insightful - and meant to help dispensary owners save money, stay compliant and build strong best practices like documentation, tax compliance, and data analysis to help them succeed in this complex space.

Zach currently serves as VP-Accounting for a portfolio of Propeller clients. He formerly worked with Grassi accounting.
Zach has advised clients in the crypto, cannabis, real estate, healthcare, nonprofit, fintech, media and cpg sectors. He works as fractional CFO and advisor, advising clients on matters including corporate and tax structuring, financial modeling and projections, data analytics, technology implementations, process automation and operational assessments. Here are his 4 tips on how dispensary owners can run a better business.

1 - Keep proper documentation on policies and procedures.

One of the biggest takeaways that Zach gave dispensary owners is to make sure you have it in writing - if it isn't written down, it doesn't exist.

“If you can’t prove something in writing, it might as well not exist.”

This sentiment is shared by everyone from the IRS to the state departments of taxation, the various regulatory bodies and investors in the cannabis industry. Documentation is the only way to prove that something happened the way you say it did.

There are various events and operations that you have to keep track of within your business. Recording these operations will help you have an accurate account of your business' standing and avoid the pitfalls that arise out of improper documentation.
Some of the things that Zack says you need to keep track of include;

·         Operating cash

·         Accounts Receivable

·         Accounts Payable

·         Cost of Goods Sold

·         Inventory

·         Physical security of the premises

·         Cyber security

·         Team members and other personnel

Zach cautions us against knowing our internal processes but not having them written down and included in a formal policy document for how the dispensary operates and handles certain things. A good example here is when filing your tax returns. You can calculate everything accurately and apply all the necessary deductions and allowances. Still, without proper documentation, you won't be able to successfully defend yourself if somebody challenges what you submitted. This is why it is essential to record and document every internal process in your cannabis dispensary.

Another example that he gives to illustrate why documentation is essential is inventory management. Imagine you have a certain amount of goods allocated in your cost of goods sold at a certain price. You would find it hard to prove to a third party which inventory was sold and which inventory is still in the store without a proper inventory management system. So how do you prove what was sold and what wasn't?

Suppose your merchandise is barcoded, and every sale has a barcode corresponding to the barcode generated when you purchased it. In that case, you can easily prove to regulators and any other third parties that you sold what you say you sold. If you also have a well-documented inventory accounting system like FIFO or LIFO, then you are fully protected against any accusations of erroneous reporting, which could save you from paying fines.

Documenting your internal Standard Operating Procedures (SOPs) can also help you articulate the employees' job descriptions better. For instance, if an invoice comes in on a certain day, how is it handled? Who signs off on it? What do they do with it after? Who sends the physical check in the mail? And who is responsible for overseeing that?

While this can be tedious and daunting, it removes any ambiguity over what everyone’s role is and instills a culture of accountability within your team members. This, in turn, will help you rely on your team and depend on them to do their jobs and back you up when you need them to.


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2 - Minimize the risk of fines in your store.

The answer to this question depends on where in the country you are. The State, town, and sometimes even the municipality you are in will play a significant role in the rules you need to comply with to avoid paying any penalties, fines or even possibly facing jail time.

However, while the cannabis industry is still illegal for all intents and purposes on the federal level, on the state level, it is worth remembering that you are running a business after all. So some of the practices in the retail business still hold. These include;

·         You have to get the appropriate licenses and permits.

·         You have to file your tax returns in time.

·         You have to make payroll every month and make the relevant deductions

·         You have to comply with the Standard Operating Procedures set out by the
governing authority in your area, for example, legal business hours, the legal minimum age for customers, inventory management, security and more.

According to Zach, the best way to stay on top of compliance is to know your market and business. Cannabis laws in the US vary from State to State and sometimes vary within a state from one town to another. For this reason, it is crucial that you know the specific laws of your jurisdiction. For instance;

·         What is the compliance landscape of your area? (who, what where, why, how)

·         What is the regulatory body, and how accessible is it?

·         What forms are you required to file?

·         What has to be paid and when?

·         What software or tools do you need?

There is no other solution to getting fined other than doing your research or have someone you trust to research to make sure you know what you need to do and what to avoid. To summarize this, Zach says;

“Knowing your compliance landscape means making sure you understand ‘the who,' ‘the what,' ‘the where,' ‘the why’ and ‘the how.'"

The other main thing to remember with compliance is leveraging the tools and software designed to ease these processes. For example, using POS software that complies with your local regulations could help you conform even to simple regulations that are easy to forget, like closing time. For example, if the POS system closes at a predetermined time such that sales can't be made past that time, then you don't have to worry about enforcing that.

Another software you could rely on to ensure compliance is payroll software. It is crucial to report the right amounts, calculate the proper deductions, and submit your payroll on time. KayaPush can also help you with this depending on which State you are in.

Such tools can come in handy in a state like California, where the rules vary from one municipality to another. Furthermore, new rules and regulations keep coming out as further information is gained, like the recent banning on Delta-8 THC around the entire US. Keeping up with such changing regulations requires the assistance of tools whenever possible.

However, Zach cautions against public access databases since they rarely have all the details you need to guarantee compliance. So you have to go past the publicly available information, which means either paying a lawyer or consulting or subscribing to a database that has all the information you need. If you have any questions that are still unanswered even after doing the research, then you should contact your State-level government board. They will never lead you astray, so they are a resource you can always fall back on.

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3- Ensure you are complying with cannabis taxation regulations.

Because cannabis is a Schedule 1 drug, the cannabis industry in the United States is governed by the Internal Revenue Code Subsection 280e. This subsection states that the business cannot make any deductions for itself when computing taxable income. Therefore, the only recognized deductible is the Cost of Goods Sold. This is why the Cost of Goods Sold figure is especially important in the cannabis industry.

To illustrate this, Zach gave the example of a business that books a sale of $100. He assumed a Cost of Goods Sold of $30, leaving the company with a Gross Revenue of $70. Now, in any other business that is legal on a federal level, there are several deductions that you can make before arriving at your taxable income. These include operating expenses like rent, utilities, salaries, and financing expenses like interest on bank loans. Now let's assume that these deductible expenses add up to $30. That would leave the regular business with a taxable income of $40, out of the $100 revenue is booked.

However, that is not how it works for the cannabis industry. The taxable income in the cannabis industry would be the much higher $70 and not the $40 that the ordinary business is paying. To put it in simple terms, cannabis businesses pay more taxes per dollar of revenue than standard businesses. If we assume a tax rate of 30%, the cannabis business would be paying $21 in taxes out of every $100 in revenue. In contrast, a regular federally sanctioned company would pay $12 out of every $100 in revenue.

Cannabis dispensary operators must know this before filing their income tax returns. Failure to comply with this method of calculating taxable income could lead you to be charged with tax evasion and having your dispensary's license revoked. This will also help you plan, which Zach stresses is essential when dealing with tax compliance.

Zach adds that this is probably the reason why the federal government is reluctant to de-schedule cannabis as a Schedule 1 narcotic because they are making too much money;

“However, I don't think that's going to be coming up anytime soon. I think there are too many hurdles to get through; there are too many complications, and to speak frankly about it, the federal government makes too much money. So as soon as you can prove that the government will make a dollar more from having a legally operating structure, I think it will happen pretty quickly. But, we're just not there yet.”

The state taxes are different, however. On the state level, it is common that you get some add-backs that would reduce the taxes you are paying slightly, but that is dependent on the State your dispensary is in. Check with your State's tax code to find out whether this applies in your State.

Finally, Zach mentions that there are no federal tax credits for the cannabis industry, so do not apply for them or game the system. It is not worth the risk, even if the temptation is there.  

4 - Use data to make better business decisions.

Zach reckons that this is the most exciting element in running a cannabis business, or any business for that matter. Companies today gather a lot of data, whether they know it or not. For example, suppose your cannabis dispensary has POS software and inventory management, and your cameras have software to count and report your daily foot traffic. In that case, you are gathering a lot of data that you could deploy to inform your business decisions and be more efficient and profitable.

Data analytics is helpful for businesses that want to grow in scale and increase their profitability. Simple information like knowing what strains are selling the most, what days are your best revenue days and what products don't move as well can all inform your business decisions.

It would help if you looked into using automated data extraction for your business. The right data extraction tool can save you money, time and losses that would otherwise be spent on manual data extraction, which is slow and inaccurate. In addition, automated data extraction tools can gather data from everywhere, including your internal software and social media platforms for customer-related data.

Once you have extracted the data, your data analyst or CFO can help you analyze the data and synthesize good, intelligent, data-driven decisions. You can also use analytics to evaluate your business’ performance using Key Performance Indicators (KPI). These could help you understand whether you are exceeding your expectations or if more effort needs to be made to meet your targets.

Your KPIs can also help you evaluate your team’s performance and your own business’ performance compared to the competition. Speaking of the competition, you can also use data analytics to know what your share of the market is compared to the competition and thus what you need to do to grow your market.

What are the key takeaways on cannabis accounting best practices?

Zach covered some crucial information that everyone running a cannabis dispensary or intending to open one would need to know. He started by articulating the value of documentation of all internal processes and Standard Operating Procedures for compliance with the regulators and building an effective culture within your business.

We followed this up with a discussion of how to avoid paying fines and penalties through research and knowing the rules of the jurisdiction where your cannabis dispensary is. Zach then talked about Code 280, which prohibits cannabis dispensaries from deducting anything other than the Cost of Goods Sold from their taxable income.

We finished the webinar with a discussion of how to use data extraction and analytics to make smarter data-driven decisions. This helps your company run more efficiently and more profitably.

How can I use software to stay compliant at my dispensary?

Cannabis technology that can help keep you dispensary compliant, including dispensary payroll software, dispensary accounting software, compliant POS solutions, track and trace technology, project management software, and dispensary HR software. Furthermore, there are other software programs that can help dispensaries stay compliant with state and federal laws.

For example, you can ensure that you are using compliant dispensary payroll technology to keep up with the changing laws. This can help ensure that you are always compliant with the latest regulations.

You can also use state traceability with a seed-to-sale integrated POS. This can help you keep track of everything that happens along the supply chain, which is crucial for ensuring that cannabis and its products do not fall into the wrong hands, or get contaminated by coming into contact with any hazardous substances.

Whatever you do, keeping track of your documentation, hours and expenses is key if you want to succeed in the cannabis industry.

Want to watch the free live webinar with Zachary? Watch it on demand below!

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