We are very happy that Sandy Suchoff of The Canna CPAs was willing to chat with TNMNews to tell our followers about the specific challenges that cannabis companies face when trying to file taxes and do general accounting. As a 20-year veteran of the accounting space, Sandy and the accountants of The Canna CPAs are one of the top firms in the country catering to the cannabis industry.
Sandy, to start please let our followers know a little about Canna CPAs and what you do.
Sure, we are a CPA firm that caters to marijuana businesses and its unique industry. Since the Internal Revenue Code severely limits deductions for cannabis touching entities under U.S. Code § 280E we help these businesses maximize deductions through strategic tax planning, proper GAAP cost accounting and comprehensive back up documentation and workpapers. Our services for the cannabis space include; tax preparation, tax planning, bookkeeping, GAAP accruals, CPA review of bookkeeping, GAAP financial statements, 280E analysis, 280E workpapers, consulting and more.
What inspired you to get into the accounting business for marijuana companies?
I founded my CPA practice, Lefstein- Suchoff CPA & Associates, LLC now doing business as The Canna CPAs, in 1997 providing tax and accounting services. In response to a family member’s health condition, I researched cannabis and the endocannabinoid system. I learned how the phytocannabinoids in the cannabis plant can help treat a myriad of health conditions with a high level of efficacy. Thereafter, I combined my passion for the cannabis plant and my love for tax and accounting and commenced catering my practice to the cannabis space.
Would you say that accounting for marijuana companies is more challenging than mainstream businesses?
I would absolutely agree with this assertion. Firstly, trafficking controlled substances such as marijuana is deemed to be illegal at the federal level, despite its legality at many state levels; accordingly this is a highly scrutinized area on the part of the IRS. To further complicate matters, IRC 280E precludes the deduction of many expenses, which necessitates additional analyses and work. Time and consideration has to be devoted to allocating deductions above the line and below the line with regard to Cost of Goods Sold. Furthermore, it is preferential and generally advantageous to utilize GAAP cost accounting contemporaneously which entails more work and substantiating work papers. Lastly, due to the illegality at the federal level, many banks do not accept cannabis owners as customers. As a heavy cash based industry, substantiating documentation is of paramount importance, but it is often laborious and time consuming.
What can you tell us about Tax Code 280E and how it is impacting the marijuana industry?
This code section specifies the following: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” Marijuana finds itself on Schedule 1 of the Controlled Substances Act. This severely limits cannabis enterprises. For instance, a dispensary cannot deduct advertisements or labor for employees that sell cannabis such as cashiers, nor is rent or utilities deductible for the dispensary where that area is used to sell cannabis. Effectively this code section creates ”phantom income” that would not be otherwise taxed in non-cannabis businesses.
What is revenue code 1.471 and what does it have to do with the state legal marijuana industry?
The United States Tax Court had explained that Cost of Goods Sold is not deemed to be a deduction within the meaning of the tax code, but rather it is to be subtracted as an adjustment to arrive at Gross Income. This exception stems from a technicality and affords cannabis businesses the ability to effectively deduct certain expenses. § 1.471 of the Internal Revenue Code centers around the need for inventory and how certain deductions are allocable to inventory. The ability to allocate expenses to inventory is clearly advantageous to the cannabis owner. In general, IRC 1.471-3 governs retail such as dispensaries, and IRC 1.471-11 governs manufacturers such as extractors and cultivators. These code sections discuss the best accounting practices to clearly reflect income which incorporates the need for inventories and the advantageous Cost of Goods Sold referenced above.
What exactly is GAAP and how could it help marijuana companies financially?
GAAP or Generally Accepted Accounting Principles is a set of authoritative standards or rules that include the details and complexities of business accounting as set by the Financial Accounting Standards Board. Accordingly, GAAP acts as the foundation for a set of approved accounting methods predicated upon established concepts. What is pertinent here with regard to the cannabis space, is the correlation to IRC 1.471-11 discussed earlier. Specifically, this code section talks about the inclusion of certain additional inventoriable costs for purposes of the taxpayers’ financial reports, but only if the treatment for the computation of these costs are consistent with GAAP. So another words, if the taxpayer adheres to GAAP accounting consistent with the Code Section, then they will be allowed to deduct more expenses, which translates to a lower taxable income and a lower tax!
Do you have any tips as far as best practices for cash-only business?
Yes indeed! Documentation, documentation, documentation! All receipts should be filed and stored; our best practice dictates that this should be done not only as a hard copy but in the cloud as well. As a consequence of the scarcity of banks in this pace, this contributes to a higher probability of being audited. Reconciliations with physical inventory, seed to sale tracking software applications and the books are also advocated in this space.
What type of entity structures are best suited for marijuana companies when it comes to accounting and for taxation purposes?
In each indigenous case, there may be different outcomes as to what type of entity yields the best tax benefit for a business including those in the space. In some instances, flow-through entities such as Schedule C for retailers, Schedule F for farmers, S-Corporations, or LLC partnerships reported on Form 1065 may yield lower tax rates and in other instances, it may not. All of the aforementioned tax filings result in the business income being reported on the taxpayer’s individual tax return. This may pose additional risk and responsibility for the business taxes associated with the cannabis enterprise. In contrast a C-Corporation will not have its income pass through to the individual’s tax return.
Are cannabis companies audited more often than traditional businesses and if so, how much more often?
Quite frankly, statistics for the cannabis industry is not well published and IRS auditors are still learning about this industry more and more all the time. It is fair to say in my opinion however, that as both a federally illegal business and a heavy cash based industry, that cannabis businesses are statistically more likely to be targeted by the IRS. Proper recordkeeping, and GAAP accounting can reduce their exposure in the space.
What are the best ways for cannabis business owners to find out more about Canna CPAs, and will you be speaking at any upcoming events and if so where and when?
They can log onto our website at www.thecannacpas.com, email us at email@example.com, or call 833-CPA-CANA or 833-272-2262. We will be speaking about cannabis accounting and tax, and / or exhibiting at the following for those readers who missed us on August 25th in Miami at the US Cannabis Conference & Expo:
- Speaking at the NJBiz Cannabis panel September 18th at 8:00 am at the Imperia in Somerset, NJ
- Exhibiting at the CWCBE in Los Angeles, CA Booth #721 09/26-09/29/18
- Speaking & Exhibiting at the RAD Expo in Portland, OR 10/10-10/11/18
- Speaking & Exhibiting at the CWCBE in Boston, MA 10/17-10/20/18
- Speaking & Exhibiting at the MJBizCon in Las Vegas, NV 11/14-11/16/18
We want to thank Sandy for taking the time to provide her insights. Every last bit of information the cannabis industry can get to help move the industry forward is precious. Everyone owning or working within the marijuana industry knows the tremendous challenges of working in a cash only business.
banking redulationsCannabis taxescash industrycontrolled substances actGAAPIRC 280Emarijuana accountingrevenue code 1.471Sandy Suchofftax code 280EThe Canna CPAs