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Balancing the Future Ep. 28 - Navigating the World of Cannabis Accounting with Naomi Granger
259 Plays3 days ago
CPA and cannabis expert Naomi Granger joins host Chris Mitchell to unpack the unique financial landscape of a state-legal yet federally illegal industry. She explains how Section 280E’s tax bite, cash-only banking hurdles and patchwork state rules squeeze operators, why strong inventory and cash controls are vital, and where accountants can add value as CFO-level advisors. Granger also highlights her National Association of Cannabis Accounting & Tax Professionals, a forthcoming exposé on 280E’s constitutionality, and the ongoing fight for banking access and legislative reform. Join us for a crash course in turning passion for cannabis into sustainable, auditable profits.
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Transcript
Introduction to Naomi Granger and the Cannabis Industry
00:00:00
Speaker
Thank you.
00:00:09
Speaker
Welcome to another episode of Balancing the Future. And today we're going to speak with Naomi Granger. Welcome back. Thank you. Thank you for having me. Awesome. Awesome.
Accounting and Compliance Challenges in Cannabis
00:00:18
Speaker
She is the expert as it relates to the can cannabis industry. And we're going to be talking about accounting principles and the whole auditing process. So really basically one on one. So, you know, give the audience just an update on what's going on with you.
00:00:34
Speaker
Oh, same old, same old. I'm busy doing a lot of research when it comes to cannabis. I'm actually going to release an expose, a four-part expose on the legality of Section 280E in the cannabis industry. So we'll get into what that means in this conversation. But yeah, just doing a lot of ah training and education in the cannabis industry, as well as working with my clients across the country.
00:00:59
Speaker
Wow. Well, but that's very interesting. yeah So let's just spend some time on the uniqueness of the cannabis industry. What's a standout? What's different about it?
00:01:10
Speaker
So it's federally illegal. It's state legal. So that's that's good. So that's the number one thing that makes it totally different. There's no industry in the country that's federally illegal and operating um within state rules and regulations. Even gaming, when you look at that, even gaming and alcohol and tobacco, there's some states that have opted out of gaming. They've opted out of alcohol, but it's still federally legal.
00:01:36
Speaker
Cannabis is the only one that only has state rules and regulations.
Federal vs State Legality Issues
00:01:40
Speaker
Wow. Wow. Well, when I think about the challenges, so what would be the challenges specifically for this particular industry?
00:01:48
Speaker
Yeah. So when you're state legal, then that means every single state writes their own rules and regulations. And so for compliance purposes, you have to understand that state. You have to understand the licensing requirements. You have to understand. And from the accounting perspective, what is the cost of compliance? What's the cost of your annual renewals?
00:02:08
Speaker
um So for budgeting purposes and some of those renewal fees can get into the six figures. $100,000, $300,000, up to $1 million dollars just to renew your annual cannabis license.
00:02:19
Speaker
um So that's one thing. um Another thing is since it's federally illegal, they're not able to get banking. um So they have to have state banking, which is you know federal credit unions and things like that.
00:02:31
Speaker
But they can't get banking with like your Bank of America, your Wells Fargo Bank and all of that. And so transacting money is not as simple. So you have a multimillion dollar company.
00:02:43
Speaker
You don't have a debit card. You're not able to walk into a branch and make a deposit or withdrawal. ah You may or may not have access to ACH payments. youll You'll definitely have a checkbook and that's about it and you have to deal with cash. You can't do use credit cards.
00:02:59
Speaker
ah Some places can use debit cards. You have to find a processor who will process debit cards, but you definitely can't use credit cards in these facilities. So you're pretty much a cash cash business.
Operational Challenges in Cannabis Business
00:03:12
Speaker
so So it's all about the movement of money in the transaction activity. Is that why it's so sensitive? Because it can't go from i'm trying to help the audience understand you can't be going from state to state moving currency about and money's about. Is that the reason why? Yeah. So with it being federally illegal, you can't cross, you can't use any federal rules.
00:03:31
Speaker
as So you can't use the federal credit rails, which our credit cards are processed over. ah You can't use the credit, the federal banking rails, which Bank of America, Wells Fargo, like you can use your debit cards and credit cards in any state in any country.
00:03:46
Speaker
But since it's federally illegal, you can't use those assets and you can't have any inter interstate commerce. So if you think about it, yeah you can't transfer goods. So inventory from one state to the next.
00:03:59
Speaker
um So you have cannabis and it doesn't matter if you are growing cannabis and selling cannabis in California, which is a legal state. And then you also have Nevada right next door to California, which is another legal state.
00:04:11
Speaker
You cannot sell California grown cannabis to Nevada. date to Nevada residents or Nevada dispensaries or distributors and vice versa. You can't go from Nevada to California because in order to do that, you either have to cross the federal highway, the federal airway, the federal mail system. You have to use some form of federal um assets in order to cross those state lines. So it's completely landlocked, which means the seed or the plant has to be grown and sold within state lines.
00:04:46
Speaker
um and which makes it pretty difficult because we're in Nevada, which is a desert. oh yeah And it's a very difficult place to grow agriculture. like And there's no other agricultural products. Like you get avocados from Mexico and bananas from you know wherever. There's always, you know, that there's a best place and a best climate to grow certain agricultural products.
00:05:08
Speaker
ah But here we're required to make it happen. So you have indoor grows, which is extremely expensive. to create an indoor grow that has the exact environment that you need, the water, the water filtration systems, the chemicals that are needed in the water to to make it work in the in a desert climate, um as opposed to somewhere in Northern California or somewhere in Oregon where you can just have an outdoor grow and use rainwater. And so you you can imagine how much cheaper It is to grow something in ah in a state like that, as
Entering the Cannabis Industry as an Accountant
00:05:44
Speaker
opposed to Nevada. So our product, our access to medicine and all that stuff is a lot more expensive just because of the way that the way that the industry is is operating now.
00:05:56
Speaker
So I'm thinking about the business side of it and I want, I'm going to, see I'm a CPA. i want to get in the business. How, how does that work? Is it a different certification? i mean, how does that process work for me to be able to go out and audit and be a part of that from an accounting perspective?
00:06:11
Speaker
I would definitely recommend that you get some type of training and education around the industry. um And at first, you just need to understand the ins and outs. What does it mean to be state legal and federally illegal? And I kind of touched on that. What it means is you have to go in.
00:06:27
Speaker
depending on which state you live in or which state you want to target, because we only have 24 states that have adult use regulations. So you have to choose from those. It's not every single state. um We have 38 with medical, but typically you want the adult use clients.
00:06:41
Speaker
ah That's ah just a larger volume. But you have to understand the state rules and regulations. What's required? They have... um and You have to figure out what the banks are. You have to figure out who the insurance providers are. You have to figure out what the seed to sell track and trace systems are.
00:06:57
Speaker
You have to figure out what the sales and excise taxes are for that state because each state has different sales and excise tax. Some states tax cannabis based on the sales price, which is typical. We're used to seeing that whenever you go into a store and you purchase a product, you pay sales tax.
00:07:14
Speaker
So that's the same. um The rate is different, but that's the same concept. Some states tax cannabis based on weight or volume. So pounds and some states tax cannabis based on potency.
00:07:27
Speaker
So the amount of THC that is in the cannabis. So um the percentage um I think. It's like, and it jumps, it goes from if you have 10% and I'm just making these numbers up, 10% or less, you're taxed, 10% excise tax. But then if you're above 10%, it's like a 25%.
00:07:48
Speaker
Like it's a significant jump and it's kind of like to encourage people. growing lower potent products. um But yeah, you have to understand what all that is so that you're making sure that you're calculating the excise tax properly for your clients. um And then on top of that, you have to understand the POS systems.
00:08:07
Speaker
So when it comes to cannabis industry, when it's any type of financial service provider, so we already talked about banks, but POS system providers, you can't just get Square or you know any of those types of POS systems. You have to get a cannabis system specific POS system.
00:08:22
Speaker
A lot of accountants don't want to touch it. Like a lot of people who are touching money, they don't want to touch the cannabis industry because of it being federally illegal. And you are technically still money laundering in that process. So there's a whole, a lot of things that you have to do around that to make sure that you're, that you're protected.
Profitability and Taxation Issues
00:08:41
Speaker
um But with that, so you you have to understand the POS system. A lot of these systems are new. They're just being developed um maybe in the last 10 years. And you know, when you have new tech, you have bugs, you have kinks, you have issues with that new tech. um And so sometimes what we saw at the beginning was the excise tax was a cumulative tax.
00:09:02
Speaker
um So first you're taxed on, you know, $100 and then you pay the sales tax. And then if that's 12%, then at $112, then at a hundred and twelve dollars that number is what you pay the potency tax. And then, you know, it's cumulative.
00:09:15
Speaker
And a lot of those POS systems didn't calculate that properly. And so what was happening was at the point of sale, the tax wasn't correct because of the way of the POS. So then the business owner is responsible for that difference.
00:09:29
Speaker
So there's a lot of those things that you don't even think about in another industry that you have to consider that need you have to consider in this industry to make sure that your client understands, you know, what's required of them. And so that they don't have this crazy tax bill that they weren't aware of at the end of the quarter or the end of the year.
00:09:48
Speaker
So who's really making money then? Because it seems like with all these rules and and the taxation and everything, is it profitable? Is it a good business? I mean, the government's definitely making lot money. The government's making money, yeah. What I say is not every miner struck gold, but every miner needed a shovel. So the people selling shovels were the ones that were making money. So, mean, a lot of the ancillary businesses are making money.
00:10:12
Speaker
ah The cannabis operators, they pretty much break even now. um They're not, you know, super. Everybody thought it was just going to be a gold rush and they were going to be super profitable.
00:10:23
Speaker
They called it the green rush, um but they were going to be super profitable and, you know, just money coming out of everywhere. And they're seeing that the cost of compliance makes it pretty difficult to be profitable in this industry.
00:10:36
Speaker
And it's not just um the cost of compliance with the state rules and regulations, but the tax, the 280E tax, the phantom income tax. um These cannabis operators are being taxed above 70 percent when. That's insane.
00:10:53
Speaker
Yeah, the average corporate tax is only 21%. um And so you can't even, you know, 70% tax, 30% to payroll. you You have no more percentages to to run your business. How are you going to pay rent? how are you going to pay your utilities? how are you going to buy inventory? You know, and inventory is typically around 50 to 60%. So you're really kind of out of percentages with just your I was about to say the math doesn't add up. Yeah. So, I mean, it's...
00:11:19
Speaker
Yeah. Yeah. Yeah. So what for accountants, why would we want to do it then? Why would we want to be a part of this? Well, it's a really exciting industry for me. Like, I mean, I like to learn. um i get a little bit bored when it's the same old, you know, bank reconciliation every single month. Everything's tying to the penny and, you know, the same old, same old. So there's a, you know, there's a lot to learn in this industry.
00:11:43
Speaker
And not only just the accounting part, but I'm also learning a lot about our political process, learning a lot about um our rights as citizens, um our rights to speak to our our representatives and go and and advocate for ah marijuana reform or cannabis reform and, um you know, things like that. So it's just really exciting. I love working with my clients and there are ways to help them um be successful and be profitable.
00:12:13
Speaker
ah You just have to really understand the industry, really understand the business operators, more of a CFO level. is what they really need. I mean, they definitely need bookkeepers. They definitely need, you know, account managers and things like that.
00:12:27
Speaker
But in order for them to be profitable and successful, they need somebody at that CFO level who can kind of pull the numbers together, as well as understanding the operations of the industry and help them dissect, you know, what's going on. And what moves do we need to make in order to be profitable? And not only the CFO level from the accounting and bookkeeping side, but from the tax side, because there are ways for them to get around the not get or I hate using that word get around.
00:12:55
Speaker
But there are ways for them to help minimize Some of the 280E tax burden, um some of the excise tax burden. um you know There's just a ah lot of different things that they can do, but they definitely need to be doing quarterly tax planning with their tax CPA.
00:13:13
Speaker
So please explain, because you've mentioned this twice, 280E. Yeah. Let's go into that. Yeah. So 280E is a code in a tax code, Section 280E.
00:13:23
Speaker
um And it's just one sentence. And it's a powerful sentence. And it says... It's just like the tax code. Yeah. Just one sentence. And I'm just paraphrasing, but it's just... um It says, no deductions or credits are allowed for any business that's in the business of trafficking in...
00:13:42
Speaker
a controlled substance within the meaning of Schedule or Schedule controlled substances. um So what that means is if trafficking, meaning, you know, dealing, um if you're selling any type and any type of controlled substance, so we have what's called the Controlled Substances Act. And back in the 70s, drugs were scheduled from Schedule 1 to Schedule 5.
00:14:08
Speaker
And the way that that worked was, one, meaning it's the most dangerous, It is very, um it's highly addictive and there's no medical, no known medical benefit to five with that that being like, I think, Tylenol with codeine or something like that.
00:14:26
Speaker
But all of those drugs from one to five are all drugs that are, you require, it requires um a ph ah ah a prescription in order to get. And so cannabis back in and when this was developed was class schedule one.
00:14:43
Speaker
which means it's the most restrictive schedule. It's the most dangerous thing out there. i mean, I think LSD and and heroin are Schedule II. So they're even less dangerous than marijuana, in according to our government and according to the Controlled Substances Act.
00:15:01
Speaker
So both Schedule I and Schedule II drugs are on this 280E code, which means if you're selling drugs, If you're trafficking any drug within those definitions, then you cannot take any deductions or credits.
00:15:14
Speaker
And so what that means is you you have to pay taxes on gross receipts. And so all of our accountants know you have revenue, you have cost of goods sold, and then you have gross receipts.
00:15:27
Speaker
And then after grocery seats, you have all of your operating expenses expenses, which is your rent, your payroll, your utilities, your advertising, all the all the expenses that it costs and are all the money that it are, all of the expenses to run your business.
00:15:45
Speaker
And so then after your operating expenses, then you have your net profit. So every other business in the country, they pay taxes 21% if it's corporate corporate taxes on net profit. Cannabis pays taxes 21% on gross receipts, which means if therere if they're not profitable, they're paying over 100% taxes because they're still liable.
00:16:09
Speaker
So I'm going give, and and this is the example I always give, you make a million dollars, you have half a million dollars of cost of goods sold. So you have half a million dollars of gross receipts.
00:16:21
Speaker
And then you have $250,000 of operating expenses, which, you know, that's being reasonable reasonable. You can have half a million dollars in operating expenses and have zero. Well, a cannabis business pays 21% of half a million dollars and every other business pays 21% of $250,000, which is after their operating expenses.
00:16:43
Speaker
So in essence, cannabis has already paid double the amount of taxes in any other business um just from that one example.
Legislative Efforts and Business Viability
00:16:51
Speaker
And so that's how you can easily get into the 70% tax ranges up to the 100% tax ranges.
00:16:57
Speaker
And that's a corporate tax. Now, it gets even more complicated when you work with partnerships. And so that's why we never recommend that any cannabis company is just a partnership, a flow through entity, because then what happens is that half a million dollars flows through to the owner's personal income return, even though there was not a half a million dollar distribution.
00:17:23
Speaker
And so now on your personal income tax return, your K-1 or however you you flow it through, um you have you have to come up with taxes for that half a million dollars, even though you haven't received the money.
00:17:35
Speaker
um So then now you're in debt and you have you have to, you know, do whatever. If you have another business, then you're paying for taxes for your cannabis business from your other business or from your household or from your job or from your spouse. Or, you know, you have to come up with that money. And it's like you're you're paying money on you're paying taxes on invisible income.
00:17:54
Speaker
This can't continue, though. It can't. just saying it doesn't make sense. It doesn't. Because when you think about the the financial model and and how things are set up. So what's what's in the works? There's got to be something in the works as it relates to all of these rules.
00:18:08
Speaker
Because it has to be a profitable business, not just for the government, yeah for but for those that choose to enter it. So is there anything on the horizon as relates to legislation or changes that are on the way?
00:18:20
Speaker
Yeah, so we've been fighting this for over 10 years now. um And there's tons of bills that have been introduced. um They haven't been passed. um We have the States 2.0 bill currently active right now. And I just um i was in DC last month um on Capitol Hill.
00:18:38
Speaker
knocking on doors and speaking to state regulators and telling them, letting them know about the state's 2.0 bill and making sure that they understand what it means um and that we would love for for their support.
00:18:51
Speaker
um We have the Safe Banking Act that's out there. It didn't pass. it's It's been introduced dozens of times. It hasn't passed and we keep reintroducing it, but that gives them banking access, which also i um i spoke about banking, but I didn't even speak about what the limitations in funding.
00:19:11
Speaker
So you not only can't you get a bank account, but you can't even get ah a business loan. um So that to that prohibits you from even expanding your business and growing your business because you can't get a traditional loan. You have to go to a venture capitalist. You have to go to you know some type of ahp fan friends and family.
00:19:29
Speaker
um there's It's really difficult to get money for these cannabis operations so that you can grow your business. And then when you get those types of loans, those come with they're The terms of those loans and the fees and the interest rates associated with those types of loans are are just prohibitive it as well.
00:19:47
Speaker
So who's doing this? Who's entering in this business? I know you can't speak to your clients, but who does it? Who can afford to do People who are very passionate. So, I mean, OK, so we know that with or without regulations, it's there. It's it's been happening.
00:20:03
Speaker
It's been happening for the last 50 years. They've been selling cannabis for since the beginning of time. um And so it's it's been an industry prior to all of this happening.
00:20:15
Speaker
And so now that rules and regulations are coming out, there's a lot of people who are really passionate about the plant, passionate about the medicine, and they want to be able to have a legitimate legal business.
00:20:27
Speaker
um And they want to be you know on the up and up. So they are transitioning into the legal market, wanting to play the game. And they're realizing that they can't survive the regulation. they You know, you you're not able to feed your family with the the cost of regulation, which feeds the illicit market.
00:20:45
Speaker
um Because if, you know, if these businesses aren't surviving, it doesn't mean that it's going away. It means that it's just going back to how it was before. um But yeah, there's a lot of smart business owners out there that are smart um people out there that just are passionate about this industry.
Educating Accountants on Cannabis Industry
00:21:03
Speaker
Well, please touch on how you work with others to understand the business better, because I know you've got a model out there and I want you to take some time to kind of share with the audience what that looks like.
00:21:14
Speaker
Yeah. And so what I do is I help business, I help accountants um as well as well, my business owners are my clients. So I don't really train the business owner. I really train, I help them understand because, you know, ultimately the books are their responsibility. So, and what we found is a lot of accountants out there don't understand the industry and they're preparing the books incorrectly.
00:21:34
Speaker
And so these business owners are getting in trouble. So, i you know, I speak to them, I help them understand, you know, some of the base things, understanding their state excise taxes and what's required of them as a business owner and what they should be looking for when they're hiring an an an accountant.
00:21:49
Speaker
um But then I also work with accountants and I help them understand all of the the different aspects of the industry, understanding the seed to sell track and trace systems and what that means, um what you need to do with that, understanding the licensing process, understanding the different point of sale systems and how you have to kind of, yeah it's not push a button, oh,
00:22:10
Speaker
My account's reconciled. Let me go take a nap. It's a lot of manual work. um A lot of these systems, because I mentioned the POS systems and the seed to sell track and trace systems, they don't integrate. They don't talk to each other. So it's a take a report from here and put the report in here into your POS system. Now you've got your inventory in your POS system and then ah take the POS system report. and import it into your accounting system. So now you have your inventory and your sales and things into your accounting system.
00:22:43
Speaker
um So I help them understand, you know, what it looks like and and what it takes. And, you know, how do you book a cash sale into the accounting system? What's the other side of that entry?
00:22:54
Speaker
um Helping them understand that. um And, you know, just helping them understand the rules and the regulations in the industry and and just how to get started. So seed to sale. Yeah. Go that a little more detail.
00:23:05
Speaker
Yeah. OK, so seed to sale track and trace systems. They are cannabis is the only industry in the country that has this um system, this requirement. And it's a gate, ah a government mandated ah inventory system.
00:23:20
Speaker
They've tried everything they can try. Yeah. Well, if you think about it, there are pros and and cons. So the purpose of the seed to sell track and trace is um first product safety.
00:23:32
Speaker
We are selling a medical product. And if there has has to be a recall or something like that, you're able to trace those products and be able to get those products out of you know did that the population.
00:23:43
Speaker
um So that's one thing. um But then also the seed to sell track and trace systems helps diversion. So the plant is not going into the illicit market. um and But then it also helps make sure that they're collecting their tax and sales revenue, their tax ah excise taxes um at the state level.
00:24:00
Speaker
um And the way these systems work is ah they there's a couple of systems. There's um metric is one of the most popular um most popular ones. It's most ah widespread around the country.
00:24:12
Speaker
um There's also a system called BioTrack and another system called
Inventory Tracking and Controls
00:24:15
Speaker
LeafLogic. There's only a couple. And then the state of Washington has their own proprietary system that they built um ah because the others weren't meeting their needs.
00:24:25
Speaker
And so what these systems do is at these, they they give the grower, the cultivator of the product, these, what they call RFID tags. So they're just ID tags and they have a number.
00:24:37
Speaker
So what happens is when you get your seeds or you get your clones, which um a clone is like a clipping from a and another plant and you can you know, sprout, you can create new plants from those clippings.
00:24:52
Speaker
um You have like, you know, your seedling, you your seeds. And ah ah RFD tag is attached to that batch of seeds. And then as they become seedlings and they, and they become, they go through the vegetative process, um they're transferred over, the viable ones are transferred over and then they're grown. That tag follows them.
00:25:12
Speaker
And then as they grow and then they start to grow buds and they start to grow, you know, the plant that tag stays with them. And so then you go all the way through harvesting the plant where they hang it and they let it dry, it dry out. And then they, you know, trim it and then they have it prepared to sell to a distributor.
00:25:31
Speaker
um which could be a delivery, um a wholesale distributor, or a retail shop, depending on how your licenses are in your state, that tag follows that harvested plant to the retail ah store.
00:25:45
Speaker
And then, so what happens is you have metric, the tag was logged in metric and it's attached to that plant. And then not the cultivator has their own login for metric, the reseller, the retailer has their own login to metric. And when I purchase product from the cultivator,
00:26:01
Speaker
they do a transfer within metric from that cultivator to my store, my store's metric. And so now I own this RFID tag. I own this product. So it's tracked.
00:26:12
Speaker
And so then when I sell it out of my POS system, it's tracked all the way to that end user. So they know exactly what plant that product came from when it goes to the end user. And the product also, it doesn't just go like whole flower from um a cultivator to a re retailer. It also goes into manufacturing production. People make tinctures and they make um ah edibles and things like that. So the the tags follow all of those products um all the way through to the end user.
00:26:42
Speaker
So when I think about someone calling in an accountant and we have to go in and we have to build out what that framework looks like and audit that framework. Yeah. So if I call you and I'm new to the business and I say, i need help setting up a system for success, where do you start?
00:27:01
Speaker
Yeah. So you need to have strong inventory controls in place and strong cash controls in place. Those are the first two things. And then, of course, all the other controls that you need for a business, um AP, AR, you know, things like that.
00:27:14
Speaker
um But with the inventory controls, um going back to the seed to sell track and trace system, you need to the the seed to sell track and trace system is the source of truth for the state regulators. Okay.
00:27:25
Speaker
And what we're I mean, what you see is like a lot of people are focused on 280E, 280E. That's a federal tax code. And all we all know that the IRS is like three or four years behind. Typically, when it comes to a federal IRS.
00:27:39
Speaker
They're not they're never going to be there that next quarter after you filed your taxes saying, hey, something's wrong. You'll think you did everything perfectly and four years later, here they come. But when it comes to state legal cannabis operators, the federal, the um state regulators are auditing these clients within the quarter, ah monthly, quarterly. They're coming and they're pulling those state seed to sell metric reports, inventory reports and saying, hey, you know, where' where's this product? And they're making sure that it matches up with that product.
00:28:11
Speaker
um So one of the things is making sure you have inventory controls to where and and as as I mentioned, the systems are don't talk to each other. So you need to make sure that there's there's counts that are being done within the store and there's reconciliation process going back to the metric report, because sometimes there's spoilage.
00:28:31
Speaker
You know, sometimes there's product that needs to be damaged and and and you have to make sure that within not only your POS system, but also the seed to sell track and trace system that it's damaged within both so that it still
Developing Best Practices in Cannabis Accounting
00:28:44
Speaker
matches.
00:28:44
Speaker
um So there needs to be a process put in place for the counts as well as the reconciliations, as well as, you know, how do we handle all of the changes that need to be made to the inventory? So is there a, because I'm thinking about the how-to, because I know as accountants, there are reference materials for us.
00:29:02
Speaker
Where do I go if I'm an accountant to make sure that I have what I need in order to review that framework? So unfortunately, there aren't like any, ah like the AICPA hasn't put anything out.
00:29:14
Speaker
PCAOB hasn't put anything out. Because don't know what to do with it. Yeah. So i um I am the founder of the National Association of Cannabis Accounting and Tax Professionals. Wow.
00:29:25
Speaker
So I've put out guides and I've worked with hundreds of CPAs over the last eight years that I've been in the industry. um And ah as well as not only working with the CPAs and the accountants and the bookkeepers in the industry, but worked with my own clients and developed the best practices. So we...
00:29:42
Speaker
put out ah training and education over those years. And i I've been in talks with the AICPA and PCOB and asking them, hey, do you need somebody to help you ah develop something? Because we we need guidance. So like we need this official guidance out there.
00:29:56
Speaker
um So at this time, and even the IRS, we don't have the audit guides um for the cannabis industry. And ive've I've been in conversations with the IRS. They've put out um some ah guidance on, hey, 280E is a thing and you need to, but they haven't really given us like, what what is the audit guide? Like, what are your exam examiners looking for? And, you know, what what can we do and how can we make sure that we're in compliance? um um So a lot of that stuff is not out there. And, in you know, I spend a lot of my time trying to figure all this out.
00:30:29
Speaker
How'd you figure it out? the school of hard knocks, you know, working with clients and having these conversations, not only having these conversations with the state regulators, having these conversations with the IRS, the examination office, um having these conversations with operators and seeing what's going on and seeing what we can do, um having these conversations with tax attorneys who are actually fighting ah cannabis tax court cases and seeing what types of things they're able to get through that i'm I don't see.
00:30:59
Speaker
And having these conversations with other CPAs who also worked with dozens of clients and seeing. And so it's you you know, you have to there's no like hard line set in stone. This is the the correct way to do it.
00:31:12
Speaker
um But you you can use your own gut and say, hey, I feel like this seems the most correct. um And then you also have to look at the um the risk level of your client. And sometimes they want to take a little bit more risk. Sometimes they want to be super duper conservative. And so also being flexible to that when it comes to working with your clients and understanding their needs um and in where they land.
00:31:37
Speaker
So, you know, but what we do from an accounting perspective is all based on risk. Yeah. So what are the risks? Mm-hmm. Because you can get it. I know you can go to jail if you get it wrong. I understand this. But what truly are some of those risks if I assume the responsibility as ah as a CPA?
00:31:53
Speaker
Well, so as the bookkeeper and the accountant, um I mean, you definitely, if you are negligent, there's some risk there, but we need to dot our I's, cross our T's, and make sure that we have support for all of our transactions.
00:32:08
Speaker
You can only prepare the books based on the information that your client has given to you, and ultimately, the risk lands with that client. um However, if you are doing the audits,
00:32:19
Speaker
That's a whole nother ballgame. It's the same risk that you have with any other industry, though. If you are doing an audit and and signing off on an opinion that there's nothing wrong and there's everything wrong, you know, you're going to get in trouble.
00:32:30
Speaker
um If you're signing off a tax on a tax return and you are taking a position um saying, hey, two e e e just doesn't apply at all to my client and you don't have support, you don't have an an an attorney opinion, you know you don't have a strong case there, there are risks. You will end up in court um trying to fight why 280E doesn't apply to your client.
00:32:51
Speaker
um And you may or may not be able to to win that case right now. We haven't had anyone win it yet, um but we still keep fighting it because I'm in a strong opinion and my expose goes really deep into this that it it doesn't and should not apply.
Risks and Resources for Cannabis Accountants
00:33:06
Speaker
But it still does. It's still the law. Well, I'm trying to figure out because you got the small what firms are doing it because I don't know. Is Big Four doing it? and Not at all. So Big Four is not doing it. So I'm trying to figure out who's in this space.
00:33:18
Speaker
So we do have some of the mid tier firms who are who are in the space um who have a have a significant book of business um in the cannabis industry. Okay. Okay.
00:33:30
Speaker
Interesting. Interesting. So what keeps you up at night? Because you're heavily involved in it ah you've got all this expertise and you know how it's moving and all the legislation that's out there. So what keeps you up?
00:33:41
Speaker
Yeah. So I really, mean, I'm really such an advocate on reform reform, cannabis reform, because I'm seeing my clients go out of business. Right. and so And that's one of the, you know, that's ah that's another one of the risks. Like you go into this industry, you have clients um and you have, you know, they're just not viable because of the way the industry works.
00:34:04
Speaker
um You know, they may not be able to pay their bills because of, you know, the the cost of compliance and the cost of taxes. um They may, there there's probably might be some scope creep. I mean, there's a lot of things going on um as the accountant that we have to be weary of. But then also, you you know, you you kind of understand like they don't have any other options um and they end up out out of business and they've invested their entire life savings. Not only their life savings, their friends and family's life savings. They've got
00:34:35
Speaker
more, they got a HELOC out on their home, all types of things that I'm seeing just to keep up with the tax bills. um And then ultimately, you know, they're just going out of business. I i just, when I was in D.C.
00:34:48
Speaker
um a couple of weeks ago, there was an example where one of another CPA, he says his client had his his um his signature year. They made seven million dollars.
00:35:00
Speaker
um And they were able to take home thirty thousand dollars and they had a seven hundred thousand dollar tax bill. Wow. Yeah. Wow. Wow. So when you if you were to look in the camera, you would say, hey, what would you offer up? Because I know you've got the materials.
00:35:16
Speaker
I mean, how can folks get in contact with you? Because I think it's important because you've you've done a lot of research and you've respect in the industry and ah in the profession. So where do they go?
00:35:27
Speaker
Yeah, so um I have the, it's called the National Association of Cannabis Accounting and Tax Professionals, which is a mouthful. So we do go by the acronym NACATPros, N-A-C-A-T-P-R-O-S.org.
00:35:41
Speaker
um And on my website, i have resources there. So what I've been doing lately is I've been dropping weekly state specific blogs, ah which have all the information that you need for the state level, understanding the excise tax requirements, the the tax rates, understanding you know banking and inventory, the seed to sell track and trace system, and just understanding the history.
00:36:04
Speaker
When did they go legal? Who are the regulatory bodies? Who are we reporting to? So I did like a very detailed report on each state. I've got about nine or 10 states out there.
00:36:14
Speaker
And I'm focusing first on the states that have adult use regulations and then we'll move on to medical. And then i don't think I'll touch any others that' outside of that until they come on board.
00:36:25
Speaker
um But not only that, I'm in the process of releasing my four part expose on the legality of 280E, where I get go deep into how it violates six of our constitutional rights.
00:36:38
Speaker
um And I don't understand how we're able to still do this and just keep violating. You know, you have a 30 billion dollar industry um not in 30 billion dollars is just the industry of the plant touching industry that's selling the plant.
00:36:55
Speaker
But the economic impact on that, which means how how does it the supporting industry. So when you think about it, they need to have accountants. They need to have attorneys.
00:37:06
Speaker
um They need to have marketing. They need to have real estate, um payroll, you know, all those different types of things. um So with having that opportunity. with all of that, it comes to be like a $230 billion dollars industry.
00:37:20
Speaker
So we have this huge industry and we're just violating all of our constitutional rights just to operate in this industry. um So I go deep in that and I'll be releasing that. And so I have, um there's a link to join my newsletter and you'll be able to get that um get that as it's being released in your in your email.
00:37:37
Speaker
So what's your one thing that you want to leave with this audience as it relates to accounting cannabis one on one? What stands out to you? Well, you have to um'm continue to be curious.
00:37:49
Speaker
um As accountants, I know that we are, you know, everything has to reconcile to the penny and we are all the way in the black. We don't we don't like to dabble in the gray area. We are super duper conservative.
00:38:02
Speaker
um So in the cannabis industry, you have to understand that everything is not going to be perfect. Everything is not going to reconcile perfectly. You may not be able to get all of the bank statements or all of the transactions or all the receipts.
00:38:14
Speaker
You also have to understand that this industry came, it comes from an industry that was for 50, 60, 80 years, however long, on purpose, not reporting, not keeping documentation.
00:38:28
Speaker
You know, that was the goal, not to have support. And so for, you can't just, it's not going to flip a switch and then suddenly, Oh, we have to be compliant? Oh, I know exactly how to do that.
00:38:39
Speaker
they need There's a learning curve. So they need to understand. You you need to be able to be um take time with your with your clients, help them understand the importance of of being in compliance and what's necessary and how we can possibly save them money with 280E taxes if they're able to stay compliant and how we're able to keep their doors open and keep their license active um and things like that. So you have to be able to be flexible um and and also grow with them during that learning curve as they go from what we call legacy to to legal. Wow. Wow.
00:39:13
Speaker
You all learned a lot today. Yeah. you know I want to thank you for just summarizing all of that because there's a lot on the horizon. I think it's an incredible opportunity. I really do. But I think there you need to do your research before you just jump into ah this business.
00:39:28
Speaker
So thank you for being a part of this. thank Thank you for the initial launch, but definitely thank you for the deeper dive into what it looks like far as opportunity. And I know it's profitable or yeah you probably wouldn't be doing it when profitable for us as accountants. So I appreciate you.
00:39:44
Speaker
Awesome. Thank you for having me. Awesome. You know what I learned today? I learned that this is a business that I won't be in because it is ah it is extremely difficult at this point in time. Don't do it by yourself.
00:39:56
Speaker
Reach out, get the assistance, look at the chime into her website. Make sure you get the information that you need in order to be successful um because I want you to be safe and I want you to do things the proper way.
00:40:07
Speaker
Thanks for tuning in. Balance in the future. Looking forward to the next conversation.