Doing books for THC-based businesses is more complicated than one would originally expect. In the world of the THC industry, there are a lot more variables to keep track of, given the substance's legal status. Given that marijuana and marijuana-based products are still federally illegal, The rules change based on each state.
One of the big variables to keep an eye on is federal statute 280E, which prevents businesses from engaging in deducting non-COGS-related deductions or credits for federal tax purposes. Even though cannabis has been legal in most states for a while now, it is still a federally illegal substance, and the accounting for this can be complex. This means that the sales tax and profit numbers that you're going to report to your state versus what you might report to your federal government could differ based on the classification of the drug. Because the federal government still considers marijuana illegal, they will not recognize profits earned from an illegal substance.
Additionally, there is the IRC 471, which gives an overview and applies to all Cannabis companies. It states that the method used for inventory must "clearly reflect the income". Also, it must financially confirm that the client accounts for inventory, which is usually going to be GAAP and Lower of Cost or Market (LCM). This means that companies that deal in the THC industry will be held to much more rigorous standards in sales and inventory. It also means that a lot more bookkeeping goes into running a marijuana-engaged business.
It is important to note that these laws are not Limited to dispensaries; they impact tobacco shops, medical dispensaries, and truly any business that can get a license to sell the product. For example, our home office is in Miami, which, if you don't know, is a city that gets much Tourism and with tourism columns the types of businesses that seek to entertain new people looking to spend money. The THC industry is a big part of this.
There are some general tips for businesses involved with that that we would like to share, the first of which is to have an effective cost accounting template that is suited to do your 471-11s and your GAAP cost accounting correctly each month. This would be a good first step for many companies because, as with all businesses, good bookkeeping is the foundation of success. Here at Interactive Accountants, we have much experience with various companies' software to keep their records. We even make sure to understand each type of record-keeping separately. Individually we would love to consult with you on your financial needs based on everything discussed and any questions you still have. This tip may go without saying but make sure to stay up-to-date on GAAP policies to ensure that you are staying compliant with them, as they do change on a somewhat regular basis.
It is important to keep up with the news regarding cannabis laws in your area along those lines. As we have clients spread all over the US and even some outside the US, the laws that they are subject to will be very different. Continuing with the theme of Education, you're also going to want to educate yourself on 471-11, potentially even reading the entire article to understand every new detail you may need to be aware of.
Beyond those tips, there aren't many that are Universal besides making sure to stay within the government's rules and taxes. As everyone knows, each business will be different and have different laws or taxes apply to them that others won't. Here at Interactive Accountants, one of our many goals is to help you navigate please turbulent Waters. Taxes
Aside from understanding the industry, you're also going to need to understand the taxes that your cannabis business needs to know. These taxes can be broken down into three main categories that you may run into as a cannabis business. The first is sales tax; sales taxes will change based on the state you are in, and keeping a proper inventory of this concerning the next variable will be important. The second type of tax to keep your eye on will be state taxes, as cannabis-based products usually come with an additional X's tax imposed on them, and it can go up to 35%. The third type of tax that you're going to want to stay aware of revolves around recreational use taxes; in the cases of these types of taxes, they will be based on not location rather the amount of THC or the weight of the product. Essentially recreational taxes are concerned with how much of the class one substance is actually being sold or consumed at a given time.Individual consultations will be the ultimate form of Education that we can give you to help you and your business understand what rules you'll be playing by. Due to the fickle nature of the marijuana industry and its dubious legality, depending on where you are, there are not as many universal laws beyond the basics, like keeping proper inventory or reporting the correct amount of sales. We are trying to drive home because there's a lot to keep track of and all of this, and we have made it our job to be good at doing this for you.
Here at The THC CPA's,we want to invite you to take the time to explore our new website and reach out. Here at THC CPAs helping businesses grow and succeed financially is our number one goal. We are here to help! If you're still not convinced yet to give us a call, feel free to look at our other blogs regarding the help we offer various businesses and offices.
If you are a professional in any field that these tips apply, please schedule a free consultation here with our owner Matthew Shiebler, CPA. He's been practicing accounting for over 25 years now and is a business owner, just like you!