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Lessons Learned From The Cannabis Industry

Times are certainly changing in public accounting. Accounting firms across the country are now rushing to get Cannabis practice groups up and running. At Janover, we did not want to rush into the Cannabis industry, as we knew that in order to successfully launch the practice, we had to take the right approach.

In recent years, state boards have established Cannabis industry groups and the AICPA holds information sessions on the auditing of Cannabis businesses. As more states adopt laws legalizing the medical and/or adult use of Cannabis products, there will be a push to bid for these clients, find personnel with adequate industry experience and study the effects that the tax code and new tax laws have on the industry and these prospective clients.

At the onset of the “green rush”, many of the top accounting firms across the country publicly steered clear of the industry because of the risks and uncertainty surrounding Cannabis. This situation has certainly evolved, but there are still firms which are not accepting clients in the industry. It is a decision that each firm must make, especially when considering current clients, industry experience, services provided and public reputation.

Before Janover established a specialized industry group, we wanted to ensure that we had the appropriate experience and knowledge base required to provide the highest quality service that our clients are accustomed to. Acquiring the expertise was not easy, but taking the time to do the research and understand the industry has already paid off.

The accounting issues have been more complicated than what most businesses typically encounter. A major issue for these clients was finding accounting/consulting firms that were willing to take on their work. Another issue was finding well established firms with enough history, reputation and experience to give comfort to investors, banks and other stakeholders.

We spent the first year of our participation just learning the industry. We spoke with many groups and individual growers, dispensaries and investors in the business. We learned more about growing Cannabis, extracting tetrahydrocannabinol (THC) and the medical benefits than we would ever need as accountants. This understanding, however, was the foundation for all of the structuring and accounting advice that we would provide in the future. While the industry is ever-evolving, taking this first step made the early work performed for our clients possible. We are also able to provide clients with contacts that will help them grow their business, including banks that will work with them.

Since there are no Federal laws permitting the growing, extracting and selling of Cannabis based products, there are few set national industry standards. Each state has different laws governing the industry, ranging from absolutely illegal to allowable for recreational use. Each state also has different regulatory requirements and income tax rules.

We first focused on a small group of states including California, New Jersey and Colorado. That, however, quickly expanded to include over a dozen states including Pennsylvania, Nevada, Massachusetts and Michigan. We have increased our knowledge of state laws as our clients expand operations into additional states. Learning the rules that govern the industry has been the foundation that all of our compliance work is based on. We realized that the one size fits all structure we were hearing about from clients and reading about in publications doesn’t really work. Like any other business, we make the economics and reality of the industry fit into the regulatory rules.

While the industry continues to grow and expand, we know that we need to deal with the accounting issues presented by current clients. We started our tax research with Section 280E of the Internal Revenue Code (IRC) to understand why Congress added it to the tax code. 280E is a common starting point for CPA’s and clients alike, so understanding how to properly advise and structure Cannabis businesses to minimize the impact of 280E is of the utmost importance. We look forward to addressing these and many other issues in the coming articles.

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Jason Hoffman, CPA is a senior manager at Janover LLC. He is a member of the Real Estate Group and is a co-leader of the Cannabis Industry Group.  Jason serves as the vice-chair of the NYSSCPA’s Real Estate Committee.  He can be reached at: Jason.Hoffman@janoverllc.com or 212-792-0414.

Zachary Gordon, CPA is a senior manager at Janover LLC.  He is a member of the Real Estate Group and member of the Cannabis Industry Group.  Zachary is the chair of NYSSCPA’s Cannabis Committee.  He can be reached at Zachary.Gordon@janoverllc.com or 212-792-0474.

 

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