5 Financial Horrors to Avoid For Your Your Marijuana Business

The 280E makes it very difficult for the business owner during tax time. One of the highlights from the Holland & Knight’s article is that the “Section 280E of the Internal Revenue Code (Code) prohibits the deduction of business expenses when the trade or business consists of trafficking in controlled substances”.

Your normal business expenses for the cannabis industry are now disallowed with the exception of cost of goods sold (COGS). You must be very careful when calculating your COGS. Basically, that is all you got to work with. However, you don’t want to make an error, as criminal charges can be attached to an audit involving marijuana.

The basic rule is to keep it as simple as possible. Be very careful when structuring multiple businesses in vertical or horizontal integration. If it seems as though you are only creating the business to shift a deduction, you may want to reconsider that plan.

Everyone’s business situation is unique and general advice should never be a deciding factor when making decisions for your cannabis business.

The 280E was first originally designed to not allow people with illegal businesses to have the same deductions as legal businesses. However, the state legal cannabis industry falls under its rule.

This rule basically strips away expenses and leaves you with the COGS as your only expense. This leaves the business owner paying anywhere from 40-80% rate on income taxes. With the increase in cannabis business over time, the IRS is experiencing more opportunities to conduct an audit. There are not as many cases established to have a reference to, so the IRS agent has a direct influence on the rule’s interpretation.

If that doesn't give you goosebumps, you will not be scared this ghostly season.

One way to keep yourself out of this witch’s brew is to hire a professional that has experience and knowledge of the 280E reporting and cost accounting. Yes, you can do it yourself, however I would not recommend it unless you truly studied up on the rules and had a clear understanding of its interpretation and application to your operations.

Compliance nightmares…

Keeping your license valid is your number one priority. Without that you are not legal and could come with some scary consequences.

Without an active license, you can not possess large amounts of cannabis. Not having an active license, you will put your inventory at risk of being confiscated by regulating agencies (such as the Bureau of Narcotics) and the possibility of jail time.

Do everything that you can possibly do to stay compliant and considered a state legal cannabis business. Compliance is the foundation in which your business is built from, keep it strong. Plan ahead and start collecting your documents months prior to expiration, starting with the one that took you the longest to get and ending with the quickest.

Make sure all licenses that follow are tracked and maintained properly. Everything after that is hot apple cider! Some fines that can be assessed are $5000 and more! Not to even think about the criminal charges that may be applied. Compliance is critical to your business operations and should be taken seriously. Your Cities and Counties mainly determine the compliance rules for your business’s zoning and permitting.

Maintain your operations and stay compliant. It takes a little extra effort but is well worth its rewards. Stay up to date on current regulatory changes. Those changes could apply to you! It is your responsibility to be informed. You could be missing out on opportunities or be out of compliance.

When not planning gets Spooky…No emergency fund

This October, are there cobwebs in your savings jar? Save first, then spend. Sounds simple, but most businesses don’t put away money for emergencies. Putting money aside while things are running well is critical to future operations. Some of us already use a savings account to put aside money for tax time, but it should hold more than just tax liability.

Having money saved for the unexpected is a lifeline to many small businesses. If you don’t have savings for those unexpected costs, you will end up using your capital from operations which can slow your business’s growth or even worse stop operations altogether! Savings should be a part of your annual planning and budget.

Make saving a habit. Start small. One easy way to start savings is to take a percentage of your deposit and put it into savings. Start with a small percentage between 1 and 5 percent, then gradually increase until you are at your optimal savings percentage.

Set your increase dates such as every 5th deposit or each month to increase your percentage. If saving has been difficult for you, set your increases to achieve the goal in 12 months.

However it be that you make a savings routine, stick to it. You will thank yourself later.

Investing without doing your research can haunt you….

Okay, so maybe you are financially prepared for the unknown. You can come without the proper knowledge and that too can cost you. For example, in Oklahoma, the certificate of compliance that must be obtained to get a commercial license, is dictated by either the county or city in which the facility is located.

Let’s say you find the perfect land for a grow and have a finished shop. You buy it. I mean, how could you let this pass you up?! Then the city tells you that that property is not zoned for commercial growing. Now what? Now you need to sell your property and find a new one, basically starting over. That is costing you time and money.

Avoid these mishaps and seek a professional in areas of question. If you don’t know, don’t guess! Knowledge is power and in this case money too.

Consider some of these key factors when researching for your cannabis business:

* Financing costs- What are banks charging? Should I use a cashless ATM service? * Admin- What kinds of software do I need? Can I do admin myself or should I outsource? *Payroll- Do I have a 1099 contractor or an employee? How much is Workman’s Compensation Insurance for me? *Compliance- How does my location affect me? What additional licenses must I obtain? What must I report and when? *Equipment- Building requirements? Professional blueprints?

Before beginning any major investment, do your research. There is nothing wrong with letting someone do it for you, just make sure they are credible.

Other audits to be spooked by:

Local compliance audits can consist of the bureau of narcotics, state agencies, health dept, fire dept, and code inspectors. Make sure you keep all records and follow each set of compliance parameters. Make sure records are accessible upon request. Get to know your auditors. Having a genuine understanding of each other is a great asset to both parties involved.

Communication is critical to a successful audit. This can send you howling at the moon if you are not in compliance. Non-compliant businesses can be fined or shut down due to the severity of the violation. Don’t be spooked when an unannounced visit or even planned one comes knocking at your door. You can have a calm spirit knowing that all your documentation is a click or two away.

Did a Marijuana friendly bank send someone out to inspect your documents? If not, they most likely will. It is all a part of their compliance controls to be able to back the legitimacy of their client’s business. Having your documents well organized and accessible is a great way to have a good relationship with your auditor. Make sure all your compliance reporting is current. Anytime you are audited, they will want to see your most current records. Don’t get caught scrambling to catch up for an audit. You will be flying on a witch's broom all night. Set time aside every month to do all reporting. Set reminders in your calendar for due dates for both reporting and payments.

Pro tip: Never set a calendar for the due date. Always give yourself time in case you run into an issue along the way.

Pro tip: Put a calendar reminder for your license renewal. Give yourself the proper time to complete the renewal process in time.

Hopefully, these financial horrors do not keep you up at night. Don’t let your past mistakes haunt you! If it is overwhelming you, there are professionals that can help. Or just hunker down for the weekend and grind it out! Get organized and prepared as it will benefit you in the long run. Don’t wait until it’s being requested by an agency.