Cannabis businesses are met with several regulatory challenges due to the strict standards the laws set forth.
Conducting accounting for medical marijuana companies isn’t exempt from these regulations and knowing how to utilize accounting procedures can save the business time along with money.
Accounting requires a methodical way to navigate the taxation laws in the cannabis industry to ensure businesses don’t have extra fees to pay come tax season. Getting around cost accounting, chart of accounts, 280e accounting, financial reporting, and other accounting aspects, can give your business a leg up in the industry.
There’s a lot to consider in accounting since it requires you to calculate large inventory costs and sales, depending on the volume the business is accruing.
This article dives into medical marijuana accounting and best practices on how to conduct the necessary accounting activities.
Importance Of Robust Accounting Practices
Accounting practices are important to minimize risks occurring within the business that eradicate the need to pay unnecessary fines.
Here are some other important factors to consider:
- Maintain Tax Compliance: Businesses can maintain tax compliance allowing for operations to run smoothly. Being compliant provides safety for business to conduct their daily activities promptly.
- Saves Money: You’re saving time and money by following accurate methods to conduct proper accounting activities. Without calculating proper costs for tax season, you risk paying extra fees on top of the tax the business already owes.
- Keeps Records Straight: Doing proper accounting practices allows businesses to keep an organized record. These records will always be updated and ensure nothing gets missed.
- Tracks Income Properly: When conducting accounting practices, the income coming into the business is tracked to manage cash flow and stay on top of other accounting activities.
These are some of the important factors medical marijuana accounting can provide businesses.
When done the correct way with proper procedures set in place, businesses can thrive and conduct proper accounting activities.
Compliance With Legal And Regulatory Requirements
Compliance with legal and regulatory requirements is an important part of accounting since there are many tax laws to pass through.
One compliant regulatory rule is not being able to deduct expenses that traditional businesses can deduct. This is known as the 280e tax code regulation that’s set in place by the government.
Another is taxing cannabis companies at a higher rate than other normal businesses. Marijuana companies also have to keep strict track of inventory costs for tax season to ensure they don’t get fined extra fees.
Knowing how to record the daily cannabis inventory accounting ensures you don’t miss any costs associated.
There is much more to consider with the legal and regulatory requirements cannabis companies have to follow. This is especially true for medical marijuana companies.
Setting Up A Chart Of Accounts
A chart of accounts categorizes financial transactions occurring in the business and labels each group of transactions to maintain an organized record.
Setting up a chart of accounts is essential to managing financial records of business operations from recording cash flow of income and expenses to recording financial activities.
A chart of accounts (COA) also supports businesses in maintaining regulatory financial reporting standards set forth.
To set up a COA, conduct the following steps:
- Start By Creating Five Main Category Accounts: All businesses, regardless of the industry, have five main accounts they use in their financial reporting. These accounts are liability, asset, equity, revenue, and expense accounts. The categories should help you keep organized of your business categories.
- Create Your Business Sub-Accounts: You can then create business sub-accounts that make sense for your business. These accounts can be anything from inventory product costs, sales, equipment, business rent, accounts receivable, and accounts payable. Organize these sub-accounts into the main accounts that are relevant.
- Categorize With Account Numbers: The account numbers are a four-digit system to organize the categories. For example, a liability account can be numbered 1000 – 1900.
- Keep Chart Of Accounts Organized: Make sure to keep the COA organized by avoiding adding new accounts and deleting accounts recklessly. If you want to add new accounts, be sure to do it carefully and ensure it doesn’t resemble another account you have in place.
The chart of accounts can organize all your financial records to ensure you don’t miss anything. It can make it easy for medical marijuana businesses to stay compliant.
Taxation And IRS Compliance
Understanding 280e And Its Implications
As we mentioned earlier, keeping compliant is essential to minimize risks and avoid accruing fines, especially adhering to the IRS 280e compliance regulation.
The IRS 280e compliance regulation doesn’t allow medical marijuana companies to deduct all expenses from their business but instead allows for the cost of goods sold (COGs) to be deducted.
280e compliance was set in place to keep a tight hold on drug substances like cannabis that are federally legal under the Schedule 1 Substance Act.
Marijuana businesses can’t deduct production, distribution, and sale of cannabis products, but rely on the cost of goods sold.
This forces the businesses to pay taxes on gross profit instead of net profit. The process increases taxes for cannabis companies.
However, the 280e internal revenue code may be subject to change due to the potential rescheduling of cannabis.
Cannabis may be rescheduled from Schedule 1 to Schedule III, making the IRS 280e irrelevant to cannabis businesses, according to the Congressional Research Service, “Department of Health and Human Services Recommendation to Reschedule Marijuana: Implications for Federal Policy”.
The rescheduling can have positive benefits for companies to deduct the proper expenses and minimize the extra costs taxed on them.
Conducting Financial Reporting
Generating Accurate And Timely Financial Statements
In following accounting best practices, conducting a clear reporting system to record finances is critical.
It’s essential to generate accurate and timely financial statements for your business operations. Recording expenses, sales, and other activities can provide cannabis companies with a way to minimize compliant issues down the road.
Keeping accurate records of finances can give you a clear view of your financial health. It can be hard to record all finances promptly, especially for large businesses. With an accounting professional from a cannabis accounting firm, you can save time and money.
Final Thoughts About Medical Marijuana Accounting
Medical marijuana accounting is a prerequisite for keeping operations organized and staying ahead of tax regulations.
Businesses in this sector must consider using the best practices to keep a clear financial record and conduct daily to weekly reporting of finances.
It’s essential to ensure your medical marijuana business complies with regulatory guidelines like the IRS 280e. Without knowledge of the 280e loophole, you may risk getting unnecessary fees.
For those not want to conduct laborious accounting activities, you can speak with an accountant from Green Space Accounting to help you keep finances updated and maintain compliance.