Happy Accounting

Dispensary Accounting and Why It is So Complex

Dispensary accounting is far from straightforward. As cannabis was legalized at the state level only relatively recently, it is a sad truth that dispensaries face far more scrutiny and audits than most other businesses. Additional tax limitations and accounting issues need to be considered when running a cannabis business. But alongside this, your dispensary must have its accounting processes to avoid fines or even possible shutdowns. We will run through a quick guide on dispensary accounting and explain how it has all ended up so complicated.

Section 280E

Cannabis is legal in some states, but it is still technically illegal on a federal level. It is classified as a Schedule I controlled drug, and this means that Section 280E of the IRS code applies to businesses in the industry. It prohibits businesses from deducting any expenses from gross income gained while “trafficking” Schedule I and II controlled substances, of which Cannabis is currently listed as one (even though we all know it should not be). The cost of goods sold (COGS) offers some exemptions for the purchase of materials used to grow and process cannabis commercially — so growers and extractors can still claim most of their available tax deductions. It is a little more difficult to get tax breaks on expenses related to the retail sales process. This means that cannabis dispensaries are forced to pay taxes on more than just their typical income. Dispensaries on average usually lose the ability to deduct around one-third to half of their expenses that are not related to the purchase of the products they resell, when counting income for taxes. Most of these disallowed expenses come from ordinary and necessary business costs such as advertising, salaries, and rent. To account for these expenses properly, your company's accountant must have a good understanding of the cannabis industry and what expenses are typically allowed to be deducted by cannabusinesses, while still recognizing and adjusting for IRS Code 280E. This level of knowledge is not usually required for a small or medium-sized business that does not deal with cannabis.

Different Taxes for Different States

The taxes that are levied on legal cannabis operations vary from state to state, both in number and percentage. And these can include excise tax, cultivation tax, sales and use tax, state income taxes, local taxes, and payroll taxes. This means that if your dispensary operates in more than one state, you will likely have to prepare separate accounts and apply a separate set of rules to each.

Banks Require Comprehensive Documentation

Finding a bank that will handle a dispensary's finances can be far more challenging than for other businesses. For this reason a large number of cannabis companies run cash-only operations. And if a bank does not run in the other direction from fear of federal persecution, it still tends to implement a lengthier and more scrutinous application process. Many of these banks will perform quarterly reviews of financial statements. Your dispensary must be ready with consistent records that do not show alarming and unexplainable fluctuations, as they could even cause the bank to close your account. S

Securing Funding Often Requires Clean Records

As more states pass legalization measures, whole new groups of buyers and investors are coming into the industry looking for the best merger and acquisition opportunities. They will look for dispensaries that have a reputable brand, maintain clean books, and comply with Section 280E. This only introduces another issue for a dispensary that does not keep organized with its accounting regularly.

Still Scratching Your Head?

Dispensary accounting can be a difficult task, and the threat of non-compliance looms if the rules are not followed correctly. Avoid the risk of years of litigation, large legal fees, and back taxes. Speak to My Cannabis Accountant. Our firm has specialized in accounting services for cannabis companies since 2015, and we will make sure your dispensary stays compliant.

www.mycannabisaccountant.com