By Cynthia L. Finkenbinder, CPA
Once again, we come into a new year. We will even have a new president come the 20th of this month. That has some people convinced that the world will stop spinning and chaos will reign—like they predicted in the movie Ghostbusters: Forty years of darkness! Earthquakes, volcanoes … dogs and cats living together … mass hysteria. Others, however, believe America will be Great Again and will become better than paradise with nothing but rainbows and unicorns in our future. Personally, I believe life will continue much the way it has before. The reason is that people in general don’t like change and are scared to upset the apple cart even if the apple cart is sitting between them and an amazing future.
I have found that people in the cannabis industry different: They like turning over the apple cart. But once the cart has flipped, then what? Several states will be joining this new journey down the road to legalized marijuana. New business owners will be looking for guidance from those who have been on this voyage longer than they have. What if you have already been in business for a while? Here is our advice: if you haven’t already, start getting set up for the new year now. It is critical to building your business.
So, let’s turn over that apple cart! The first step is evaluation of current processes. How willing are you to change your processes so you can get ahead of the competition this year? Even processes that have been working well for several years can get derailed. If you or your employees don’t follow the processes and procedures, or if you have a process that works well but new technology can make even better, you should think about some changes.
Now that you’ve evaluated what process, procedure, software or even an apple cart need attention, in the cannabis industry you must ask yourself: Will this new process, procedure, software or even an apple cart be deductible under Section 280E of the Internal Revenue Code?
Let’s start with the apple cart. When it is used to transport your product only (and nothing else), it can be considered a part of cost of goods sold and is therefore an eligible expense for 280E compliance. However, when that same cart is used for displaying the product it becomes part of the retail space and is no longer an eligible expense. But, hold on … you can also split the difference—using time in service, you could argue that the time spent as a display would not be eligible and the time spent for transportation would be eligible. What makes this industry so unique is that you must take the time to determine whether this same apple cart is transportation, display or both, and be able to account for its use. So, figure it out and write it down.
Yes, that is what I said—write it down. Every expense must be documented with an explanation of when, why and to what extent an expense or asset is part of cost of goods sold to show 280E compliance, and when it is not. That makes documentation the first thing to do in the new year. Go through all your processes, procedures and even expense items and document not only what the process or procedure is but also how it should be reported in your financials as either a 280E-compliant cost of goods item, cost of goods not related to 280E and everything else. Why track the expenses not associated with 280E? Because even if an expense cannot be taken for federal tax purposes it often can for state purposes, but only if it has been properly documented.
After determining whether the apple cart can be used as an expense, the next step is to evaluate the cart itself. First, is it still the best and most efficient way to either transport or display our product? We may find that it is still the best display but not necessarily the best for transportation and, if it is not the best for transportation can it still be used for the display?
For example, in my accounting practice we evaluate at the end of each year what worked and what didn’t for us and for our clients. That has led us this year to change client portals and add some dashboard software to give clients the best experience we can, so they can understand their finances better and faster. On the other hand, I love the tax program and the accounting program I use and it makes me more efficient than anything else I have seen, so we will stick with it.
I suggest that all my clients do a review and a plan. Look at the last year and see what can be improved next year. It is amazing to see how those evaluations can propel a company’s success. I’ve even done this kind review every year with my kids—granted, some of their goals and plans were kind of off-the-wall and not serious, such as wanting to rule the world and play Nintendo for a living, but they still do reviews to this day with their families. And as I look back at what they were serious about accomplishing they have done. And that makes me a proud momma.
It is now your turn to evaluate your apple cart: What worked; what didn’t. Keep what worked and find new solutions to either replace what didn’t work or to bring new life into it so it will work again. Give us a call if you need help turning over your apple cart and make this new year the best you have ever had.
Cynthia L. Finkenbinder, CPA is the owner of Alpha Omega Accounting, LLC located in Northern Colorado. She is ready to help you as you look at your plan for turning over your apple cart in 2017. You can contact Cynthia to discuss business planning, 280E compliance or any other accounting topics at firstname.lastname@example.org or visit her website: http://alphaomega-acct.biz.