Top 5 myths about serving the marijuana market

By Andrew Hunzicker, CPA

As most of you know, the legal cannabis and CBD/hemp niches are sweeping the nation, and there are several potential bills being discussed to make cannabis federally legal in 2021. Considering that more than 70% of Americans support medical cannabis, in a country divided by almost every other topic under the sun, it’s not surprising that we are quickly seeing cannabis move toward full legality. This is expected to be a $100 billion market in the next few years, with hundreds of thousands of new companies needing accounting and tax help.

As of today, marijuana is legal for adults 21 and older to possess, consume, and grow in Virginia. But there’s no legal way to buy it without a prescription. The state has set a target date of 2024 to begin retail sales, but I would expect this will happen much quicker. Many states start slowly, but as the effects of more jobs and tax dollars for cities and counties start to grow (as well as the demand), we will start to see pressure move things along on a quicker path. Not to mention, we have a real possibility of federal legalization very soon. This happened in 2018 when CBD and hemp were fully legalized in the Farm Bill.

With cannabis legalization in limbo on a federal level and individual states allowing the sale and production of cannabis, this leaves professionals like CPAs in a rather precarious position. On the one hand, cannabis companies need accounting support to remain compliant and keep their licenses. But because cannabis is still considered a Schedule 1 substance by the U.S. Drug Enforcement Administration, there is some hesitancy for professionals like CPAs when it comes to providing services to this industry.

The truth of the matter is that there are thousands of businesses springing up all over the place, and there are not enough experienced accounting professionals to go around.

Below are the top five myths surrounding providing accounting services to the cannabis and CBD/hemp niches.

Myth #1: Accounting for cannabis companies is just like any other niche.

Actually, with cannabis and CBD/hemp, we are experiencing the birth of an entire industry, including many “sub-niches” like farming, chemical processing, manufacturing of foods and products, distribution, testing labs, retail, and delivery companies. You might find all of these “verticals” in a single company or organization. 

There are major accounting and tax issues in these niches, including:

• Many vendors will not service companies that operate within the cannabis industry (accounting, POS, merchant services, payroll).
• Lack of accounting tools, workpapers, industry guides, GAAP guidance, Chart of Accounts.
• New software in the market is full of bugs, significant periods of downtime, features that don’t work, and poor customer service.
• State mandated “Seed to Sale” tracking software is difficult to use and doesn’t integrate well with cannabis or accounting software, making it incredibly difficult to reconcile and ensure that state tracking is in line with internal counts.
• Software programs are not integrated (meaning they don’t talk to each other), which leads to a lot of manual work.
• Monthly, quarterly and yearly reporting requirements are different depending on which state you’re in and where you bank. Yearly bookkeeping and recordkeeping are not an option; they must be done regularly in order for cannabis companies to be compliant. 
• Cannabis companies cannot take any tax deductions due to the substance's Schedule 1 status. There are legal ways to reduce tax liability, but you must understand the tax codes, including what is allowed and what isn’t for each vertical. Having the right cannabis accounting and tax tools will help with this.
• Workarounds are needed to deal with the lack of software and tools, and you’ll need to put processes in place to ensure compliance since there is a lack of automation. For example, to avoid theft and skimming, you’ll want to help your clients put processes in place for required daily reconciliations of cash and inventory.

The first place you’ll want to start when working with cannabis companies is to review and thoroughly understand the tax codes and how they relate to each vertical in the industry.

Cannabis accounting and tax codes

Because cannabis is a Schedule 1 drug, U.S. Internal Revenue Code (IRC) 280E says a cannabis company cannot take any deductions or credits on their tax return. They are, however, allowed Cost of Goods Sold (COGS), as COGS is a return of capital and not a deduction or credit. That brings in Section 471, which also involves complex cost accounting that MUST be done at least quarterly to maximize the allowable COGS on the tax return using 471-11.

All of this means that serving cannabis clients can be tricky if you don’t have the knowledge, tools, systems, and a deep network of resources. 

If you have what it takes, this complexity makes for great clients that will pay highly for the value you bring. 

Myth #2: CPAs will lose their licenses if they serve a cannabis company.

As of right now, there are thousands of CPAs serving cannabis companies in almost every state, and not one has lost a license simply for serving a state legal cannabis company. The same goes for attorneys, plumbers, electricians, and thousands of other service providers. Almost all of the big national firms are serving the legal cannabis niche as well.  

Yes, cannabis is federally illegal, but it is legal in many states, and these companies need good accounting and tax services. 

The American Institute of CPAs (AICPA) has recognized the need for accountants to serve cannabis companies and is on board. In November 2021, the AICPA hosted a two-day conference of hand-picked experts in the cannabis niche to present key information in an effort to better educate accounting professionals about this grossly underserved segment. If you have any other doubts whatsoever, contact your state board to learn more about serving cannabis companies as a CPA in Virginia.  

Even though cannabis licenses will start to be given out slowly in Virginia, you can serve clients around the country in some of the hotter markets and better position yourself as a “leader” in the industry. I talk to thousands of solo CPAs and accountants every year, and often hear they are frustrated when it comes to finding a great niche. In this industry, which is vastly under-served by qualified accountants, you have the chance to get in right at the beginning. It's not very often we get the opportunity to be part of the birth of a massive global industry, so make sure you at least investigate the options for your firm. 

Myth #3: This is an “all cash” industry.

Actually, credit unions and banks serve cannabis companies in many different states. For example, in my home state of Oregon, Maps Credit Union (over 10 branches) serves any licensed cannabis company.

That said, there is a lot of cash in the industry, so there is a big need for cash controls and procedures to prevent fraud and theft. Additionally, you will find many cannabis business owners have anywhere from 2–10 non-cannabis entities, such as a real estate or equipment company, and these can have easier access to banking.

The SAFE Banking Act is currently under federal review, and hopefully we will have easier access to banking and merchant services very soon for cannabis companies.

Myth #4: Cannabis companies are a “gold mine” in terms of net income.

Since there are massive taxes on this industry at the national level via 280E, as well as heavy state and local taxes, it's actually very hard for these companies to have a net income (if they are correctly doing accounting and tax).

Similar to the “tech boom,” many of these companies will lose money for years. The name of the game for founders and investors is focusing on building brands, growing revenues rapidly, vertically integrating, and staying well capitalized. Exit valuations are now based on growth and brand, NOT net income, and will likely be for some time.

I’ve seen farms go through $10 million in cash and still go under, so companies that try to enter the niche without sizable investors will have difficulty.

There is massive capital coming into the niche now, and this is expected to grow rapidly as more funds, private equity, family offices, and angel investors look to get in early.

Myth #5: Cannabis must be a horrible “niche” for CPAs.

Since there are so few CPAs in the niche right now, it’s actually a massive opportunity. Many surveys have shown that solo CPAs struggle most with finding great clients, and if that is the case for you, this might be your chance to easily find high-paying clients. We have accountants in our program who are not even CPAs and have single clients paying $200,000 a year or more for accounting and tax.  

When you consider that a small “mom and pop” cannabis business, whether a farm, dispensary, or vertical integration, will often be a $10 to $20 million company very quickly, these clients will pay sizable fees for rock solid accounting and tax. The cost accounting is not simple, and it's super important to the founders and investors for this to be done correctly.

How does a CPA get started in these niches?

Cannabis accounting is one of the most rewarding industries for those of us who love the challenge of navigating complex accounting and tax issues, implementing systems and controls, and helping our clients manage the financial health of their business, while maximizing cash flow. 

You can get involved with industry groups like norml.org (they are helping spread the national legalization movement), or attend local and regional cannabis events. I also invite you to check out our blog page at dopecfo.com, where we have many articles on serving these niches.

“Pick the right niche and become an expert in that niche.”

Sounds simple, but when I was told this back in 2014, it was certainly new to me. Being successful at any professional service business requires two things: 1.) finding good clients; and 2.) providing them with world-class service. The secret sauce is finding a great niche and becoming an expert, as that will start to bring good clients directly to you (as opposed to finding clients) and will allow you to provide top-tier service. Being an expert is more than just accounting and tax: it’s operations, product, compliance, politics and more.

If you investigate this niche and want to dive in, check out our comprehensive cannabis accounting program at dopecfo.com that includes all of the education and a complete “toolbox” of over 100 workpapers to serve the niche from A to Z, as well as a premier national community that will help support you as you get started.

Andrew Hunzicker, CPA, founded DOPE CFO and has built a national cannabis accounting/bookkeeping and tax training program to help students serve the newly developed cannabis and CBD/hemp industry. He is an expert in cannabis startups, CFO services, turnaround and high-growth strategies, capital sourcing, mergers, exits, and wealth protection. He is also a member of the AICPA Cannabis Industry Conference Planning Committee.