Cannabis CPA Advises: “Pay Your Taxes”
As any cannabis entrepreneur who is trying to develop a credit line knows, cannabis businesses face bookkeeping and IRS challenges that do not burden most other companies. What are those challenges and why do they exist? What can be done to improve the situation?
Paul Samways, a CPA specializing in the cannabis industry for the past seven years, answered these questions and more at the August meeting of Women Grow-Southeast Michigan chapter. The meeting marked the group’s third year in Ann Arbor as well as the second year for Bloom City Club, sponsor of the Southeast Michigan chapter.
Samways’ transition into the industry was not the result of a career plan. Rather, he was asked by an attorney he knew through his local networking activities if he would be okay taking a client who sold medical marijuana. “She hooked me up with my first client, a dispensary in Allen Park that lasted three months before getting shuttered,” he recalled.
Samways set up the company’s bookkeeping system with Quick Books. That was it. Oh, and then he got raided for the crime of being a CPA for a cannabis business. His court victory forced the state to say that it was okay for CPAs to work with cannabis businesses. His name got around and his business exploded. “You don’t arrest a middle-age accountant,” he explained.
The Onerous Section 280E
Today, he says, the biggest bookkeeping and IRS challenge for cannabis businesses is the onerous Section 280E of the U.S. tax code: “Expenditures in connection with the illegal sale of drugs.”
As Samways explains, Section 280E was implemented by Congress in 1982 after a Minnesota dispensary owner won in court the legal right to write off his normal business expenses. It prohibits anyone who sells Schedule 1 drugs from claiming ordinary and reasonable deductions, other than cost of goods sold. For dispensaries, he says, “280E decimates profitability and return on investment.”
“We use strategies that have held up under IRS audit in other states to mitigate the bite from 280E,” he continues. “But there’s only one way to improve it. We need to exclude medical and legal marijuana from it. The only obstacle to a rational solution is Congress.”
Solving the Banking Problem
One change that will come by excluding medical and legal marijuana will be a solution to the banking problem. Samways encourages business owners to get bank accounts. It’s not hard, he says. Just obey the following guidelines:
- Don’t wear a Bob Marley T-shirt.
- Don’t smell of weed.
- Look professional.
- Don’t try to deposit stinky money.
- Don’t store money where you store your weed.
- If they ask you if you are in the marijuana business, say yes.
Challenges in the New Environment
Samways foresees challenges ahead in what he views as a heavily regulated new environment: “Caregivers will not have an outlet for selling overages and can only sell to their five patients. Besides the challenges of growing and processing quality medicine, many license holders will have multiple licenses, including retail stores. Any of these folks who don’t have a retail outlet will have to make sure they produce quality to get shelf space.”
Meanwhile, “Service providers such as those in transporting and testing will become commodity businesses with low margins. That is, they will all do the same thing, so pricing should be very competitive with the need for exceptional customer service to grow clientele.”
To become part of that environment, there is no trick to getting a license, he believes. “Most of the effort is getting a local municipality to approve your operation and location. Understanding their fears and greed is critical.”
That said, don’t be impatient: “It would be a huge mistake to be first out of the gate so don’t be so anxious to apply on December 15. The first one submitted will be the first one audited. When LARA (Michigan’s Department of Licensing and Regulatory Affairs) starts regulating, they will make examples of people. Don’t be one of them.”
And if your license application is rejected? “There will be jobs with other licensees that can be very lucrative and include an equity stake in the new business. Also, there will be lots of ancillary businesses, like packaging and trimming.”
How’s LARA Doing?
He looks relatively kindly at LARA’s preparation for the new environment, noting that they are hiring 83 full-time inspectors. “They’re doing the best they can given what they were dealt by the legislature and governor. If they get this to go off on time, Michigan will be the first state to get a regulatory system in place on time.”
He looks less kindly at the composition of the five-member board. “Two of the board members want to shut down or otherwise replace current dispensary owners with new investors, since, in their minds, the businesses have been breaking the law.”
Envisioning a long period of uncertainly, he concludes:
People who are new or have been in the game for a while are getting anxious about how long the process has taken without any visible regulations, rules, or processes. Based on my work with clients in other states, this anxiety is going to be the norm, as opponents to medical marijuana or large players who want to monopolize the business will keep up their efforts. So if you are on the edge now, plan on either buying some real estate there or reconsider your goals and buy that Coney Island you’ve had your eyes on.
But if you stay with it, he advises, pay your taxes. “Seventy to 85% of businesses in the industry are not paying taxes. If we pay taxes, we become accepted as an industry. So pay taxes. Be aboveboard.”