By Andrew Hunzicker, CPA
The cannabis market in Pennsylvania averages about $100 million in sales every month and continues to draw interest from aspiring entrepreneurs. Yet, applying for a cannabis business license can be daunting. Pennsylvania and its local jurisdictions often have requirements for prospective license holders that cost thousands of dollars before a license is even granted. Before any entrepreneur considers stepping into this market it is imperative to invest in a qualified CPA before going through the process.
When we consider accounting professionals within the cannabis niche, often we think about how they keep clients compliant once the business is operational. But there are a host of opportunities to help a client who has yet to open for business.
A lot of technical paperwork and required financial documentation, for example, must be compiled from all involved investors and owners. There also are many expenses that must be accounted for if owners want to be able to minimize their tax liability. It is essential to have systems in place for the purchase/lease process and to ensure real estate holdings are set up correctly. In some circumstances, landlords may be subject to 280e, the part of the tax code that prevents cannabis operations like dispensaries from getting tax deductions, if leases aren’t structured properly. There may be some tax benefits if real estate considerations are strategized early on, emphasizing the need to bring a CPA on board early in the process.
If a cannabis business anticipates having investors or multiple owners on its license, an operating agreement will be vital. Though not essential in every state, it is good practice to have all financial aspects of the operating agreement ironed out early on. For instance, it may be needed for opening a bank account.
A CPA’s input can be key on numerous operational aspects. For example, advice on critical decisions such as distribution schedules, ensuring that tax distributions to the owners and investors are made by the company as scheduled, and clearly laying out how exits and capital raises are to be handled are key.
One of the biggest benefits of having a CPA involved early on in the startup process would be his or her advice on setting up state tax accounts to ensure that all state and local taxes are paid in a timely manner.
Ensuring the use of the right tools and having tax accounts and procedures set up properly is essential in ensuring the business is not raided or shut down for nonpayment. If money collected for tax purposes is withheld, there are severe consequences from which it may be impossible to come back.
One area cannabis business owners might overlook is dealing with investors. Early on in the process, investors focus on accounting and transparency. Most understand that you can’t fund a good idea without taking a hard look at the numbers involved. That’s where a CPA comes in handy. Knowing the steps you need to take in advance to ensure compliance can show how valuable your skills are before raising capital.
Investor concerns don’t end there. Moving forward, investors will demand exemplary internal controls, accounting policies, and reporting systems. They’ll want to see a perpetual data room that is available and up to date all the time, along with a corporate governance structure, board seats, a robust accounting team that includes tax experts, and accurate and timely reporting.
Not only do they want to see taxes done properly, but they also are looking for professionals who can do accurate and thorough cost accounting. Investors do not want to risk fines, penalties, loss of license, or even jail time.
To learn more about cannabis accounting or to find out what the industry is looking for in an accounting professional, visit dopecfo.com.
Andrew Hunzicker, CPA, is CEO of DOPE CFO, which provides accounting and bookkeeping training programs for financial professionals in the cannabis industry.
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