If you take a look at the Cannabis business as on date, you will find that it is mired with numerous financial hurdles. The regulations are complicated with many long-term consequences which can make you go out of business. Not just this, this industry is also mired with lack of qualified professionals like CPAs, marijuana book-keepers who can help you adhere to stringent regulations while saving you from the high risk of fines and the penalties. Here are some financial mistakes that you should avoid:
1. Ignoring IRC Section 280E
Under this section, the cannabis companies can’t deduct business expenses due to the federal status of marijuana as a Schedule-I substance. According to this code, the businesses can only write-off the cost of the goods sold which increases the taxes significantly. It means that companies should do the cost accounting correctly without violating the various sections (280E and IRC 471). It is a mistake which can end up in large fee, or you may end up paying a lot of penalties. On the worse, it may lead to complete shutdown of the operation. What can you do to avoid this complication? Here are some things that will help:
- You should learn how to your books entirely accurate and up-to-date. All the documents should be maintained for receipts and the allocation methods.
- Monthly accounting work papers should be kept tied out properly
- You should have a trained Marijuana Bookkeeper who can handle the cost accounting and also has sound knowledge of generally accepted accounting principles thoroughly.
2. Lack of Transparency While Dealing with Investors
Numerous cannabis companies need investors to succeed in their businesses and then make a successful exit. For the investor, it is crucial that these stakeholders find your company operating efficiently and comply fully with the state and the federal laws.
But many cannabis companies fall short of being fully transparent. You can make the mistake of not include a clause in LLC operating agreement which indicates that the company will make tax distributions to the investors on a quarterly basis. If you fail, the investors may have no money to meet their tax obligations.
You should also not fail in regularly sharing up-to-date financial reporting with the investors. You should maintain the books, legal documents, financials, etc. should be maintained appropriately. Most cannabis companies avoid doing this, but they are needed for communication with the investors and the lenders.
3. Making Improper Transitions to Legal Market
When you are moving to compliances, then you may have to face challenges in keeping your business afloat. It can be especially true when you were not following the rules in the first place. When you are going it for the first time, you might face challenges.
In the End
When you avoid mistakes and find the right Marijuana Bookkeeper or CPA to handle the accounting, you will undoubtedly run your business smoothly.