Story byCynthia L. Finkenbinder
Mention the words “accounting” or “bookkeeping” and everyone gets a mental picture of a tired, lonely man wearing sleeve protectors and a green visor, laboriously entering numbers into a ledger by dim candlelight. You know, the Bob Cratchit character from Charles Dickens’ A Christmas Carol. The word accounting has always had a negative vibe; bookkeeping just sounds like drudgery. We all know that it is important, but who really wants to do it?
It’s as if all our happiness will be dashed away if we really knew how much money was in our pocket. Kind of like when your friends ask you if you want to go out to the movies and you are forced to tell them you can’t afford it.
The reality is that accounting and bookkeeping are necessary tasks to successfully run any business. Properly maintained books will help you know if your business is profitable or not, and they may be instrumental in getting an investor to fund your venture. Good accounting is also critical to minimize the taxes you’ll owe the government each year.
Granted, it used to take all day to get the numbers written down on those green ledger pads, and often several people were required to maintain the books, even for a small business. However, a lot has changed since the days of Bob Cratchit. Keeping books and accounting no longer need to be laborious tasks. With the technology we have available now, we can perform basic accounting duties on a smartphone or a tablet while waiting in line, riding a bus, or even while watching your kids play at the park.
How Is Accounting for a Cannabis Business Any Different?
With few exceptions, accounting for a cannabis business is really no different than for any other business. Running a grow facility is very much like operating a farm. Producing edibles and other infused products is very similar to running a bakery or a manufacturing facility. Running a dispensary is not much different than running a retail business—other than things like needing increased security and paying employeesin cash. Now throw in state regulatory compliance, and top it off with federal tax laws and you have a new ballgame. The truth is that it’s the same old ballgame with a few new regulations to make things more “interesting.”
Section 280E Compliance
One of those more interesting regulations related to the cannabis industry is federal 280E compliance. The Internal Revenue Code section 280E was originally implemented to keep drug kingpins from deducting the costs of the airplanes that flew cocaine from Colombia on their federal tax returns. What 280E compliance means for someone with a state legal cannabis business is that they cannot deduct from their taxes all the expenses that a normal business can. The only acceptable expenses (according to the feds) are the cost of goods sold or direct costs.
For a grow facility that would include plants or seeds, soil, and a part of utilities. Why not all of the utilities? Well, I haven’t been in a facility yet that didn’t have a restroom, so technically the entire building isn’t dedicated to growing product. Even at a dispensary, only part of the building and its maintenance is deductible for federal taxes. Areas like the lobby, restrooms, and offices are not included in the deductible space on the federal tax return. Keep in mind that expenses that aren’t deductible for federal taxes may be acceptable on a state tax return where marijuana is legal. That means that bookkeeping must be properly maintained to take advantage of everything you can claim when filing your taxes—all of your information, not just that associated with 280E compliance.
Accounting professionals refer to this kind of bookkeeping as cost accounting or managerial accounting. Normally, cost accounting has nothing to do with taxes, but in the cannabis industry it can make the difference between paying tens of thousands of dollars in taxes or not. This is why many accountants or tax professionals may not be the best people to set up and maintain your books. Make sure your bookkeeper has cost accounting experience. But don’t hire just anyone—make sure they’re certified. Just like there are Certified Public Accountants (CPAs), there are also Certified Managerial Accountants (CMAs).
Set Up the Books for Cost Accounting
Setting up accounting for a cannabis business must be done in a manner that will allow cost accounting to take place. That means making sure that the Chart of Accounts is broken down into Direct Costs, or Cost of Goods and Ordinary Expenses. Gross income minus direct costs gives you Gross Profit. That’s what federal taxes are generally based on. Then subtract ordinary expenses—these include things like paying your bookkeeper or office supplies. Generally this will give you the income amount your state taxes would be based upon.
What Expenses Can Be Included as Direct Costs?
Good question. A few are obvious, such as soil and plants for a grow facility; inventory and display cases for a dispensary; extracts, labels, and packaging for an edibles producer. For example, we all know that water and electricity are two of the main costs for a grow facility. So how would you account for those costs? Typically they are based on the square footage of the building. For example, a 2000 square foot greenhouse with 90% grow area and 10% storage, offices and restrooms can take 90% of the costs associated with the entire building—including the water and electricity. In larger facilities that have several greenhouses—where only one building has an office space and the others are purely grow areas, it would be beneficial to have separate utility meters on each greenhouse. That way you can prove that the main building is 90% eligible, but the others might be 98% or more, depending on the square footage calculations.
Other costs such as payroll must be divided between direct costs and indirect costs. When an employee is trimming plants, it is a direct cost, but when they are doing bookkeeping, their time is an indirect cost. Security is also based on activity. When they’re transporting plants it’s a direct cost; but when they are transporting cash it isn’t. Another expense to account for is building out the facility. The depreciation on the building should be split between direct and indirect costs based on square footage. The costs may be split in other ways, such as a percentage of income derived from that expense, or even income vs. fixed assets percentages; but square footage or time spent are the easiest.
Consistency is the Key
You must treat each expense consistently—the same way, every time. Doing this will help you determine whether products are profitable or not, and even which employees generate the most income for your business. Accounting is really all about measuring the health of your business at any given point of time.
Cynthia L. Finkenbinder, CPA, is the owner of Alpha Omega Accounting, LLC, in Northern Colorado. With clients in 21 states and three countries, she is an expert in 280E compliance, accounting and multi-state taxes. Feel free to contact her if you have any questions about this article, or are in need of her professional services, at email@example.com or visit her website: http://alphaomega-acct.biz.http://alphaomega-acct.biz/
According to Chelsea, dealing with dispensaries at that time—in an unregulated market—was difficult. Many of the dispensaries that did exist were both disorganized and unprofessional, as well as unwelcoming. As a woman and mother, Chelsea felt uncomfortable going into them, so her husband Joseph dealt with getting the product onto their shelves.
In 2010, after learning that Measure 74—an initiative that would legalize nonprofit dispensaries in Oregon—would be on the ballot, they made the decision to go there and start their own dispensary. Chelsea took the remainder of her college fund and along with her husband, his sister and her boyfriend, moved to Ashland, Oregon.
On April 20, 2010, they opened The Greenery, a nonprofit dispensary. At the time, dispensaries existed throughout Oregon, although in a “gray” area of the law. They took a risk, counting on the passage of Measure 74—which ultimately failed, with 56% of voters in opposition. They decided to continue, hoping for the best and believing that dispensaries would ultimately be legalized.
The Greenery at first had only limited consignments of product, which gradually increased as patient awareness grew. Chelsea served as an employee and the staff eventually grew to 10 people. While the focus of the dispensary was making medical cannabis available to patients in need, over the next year it became apparent that the partners in the endeavor had different visions. It was time for another move.
In 2013, Chelsea and Joseph resigned from the Greenery and moved to Eugene, Oregon. They had considered Bend, but realized that Eugene had fewer dispensaries so it would be a better option. The main dispensary—Kannabosm—had recently been raided by the police and closed down.
The first thing they did was hire a criminal defense attorney, because they knew they were entering a high-risk business. They next found a willing landlord and rented space to open The Greener Side. While start-up was again slow, with only 10 customers the first week, sales grew exponentially over time. After four months Chelsea hired two more employees and increased the operating hours. Then the worst happened.
On May 23, 2013, The Greener Side was raided by local Interagency Narcotics Enforcement Team and Chelsea and another employee were arrested for felony charges of delivering marijuana. The store was stripped of its products and it seemed that Chelsea’s dream may have ended.
Chelsea went on to spend only six-and-a-half hours in jail and her initial instincts served her well, as local cannabis defense attorney Brian Michaels was at the ready, noting that the authorities had “jumped the gun” with their bust. Ultimately that proved to be true because charges were dropped. The Greener Side regrouped, restocked and began serving patients again. Later that year the legislature passed HB 3460, which legalized dispensaries.
Like their first dispensary, the business at The Greener Side has grown and now supports 12 employees. Chelsea is responsible for day-to-day management, personnel, bookkeeping and supervision of staff. Joseph manages products and sales.
The biggest challenge she faces today include keeping up with the changing regulations—both statutes and administrative rules—as recreational cannabis legalization takes effect and the medical cannabis program is refined. Not only must Chelsea keep up on these changes, but she must communicate them to her staff so they know what they legally can and cannot do. She currently spends about 30% of her time in the dispensary and 70% outside, networking, attending meetings and legislative hearings and educating the public.
Other challenges she faces include:
• the inability to access normal banking, which requires that all transactions be done in cash, including payment of salaries, taxes and vendor reimbursement, greatly complicating accounting practices
• Section 280E of the Internal Revenue Code, which forbids businesses from deducting certain business expenses from gross income associated with the “trafficking” of Schedule I or II substances, under the Controlled Substances Act. (For a good overview on this issue, see https://thecannabisindustry.org/uploads/2015-280E-White-Paper.pdf)
According to Chelsea, the positive aspects of the job far outweigh the negatives.
“Being able to wake up with a smile on my face and go to work” is very motivating. She started this work with the purpose of connecting patients with the medicine they need. Like many in the medical cannabis industry, Chelsea has been amazed at the positive effects medical cannabis can have on so many conditions.
She also loves being part of creating a whole new industry. And according to Chelsea, the people she interacts with—patients, associates and employees—could not be nicer or more genuine. There is a camaraderie among those working together to change hearts and minds and have a positive effect on the community.
Long advocates of giving to the community, The Greener Side holds an annual golf tournament, co-sponsored in the last two years by Southern Oregon Alternative Medicine, with all proceeds going to the Multiple Sclerosis Society of Portland.
Recently, Chelsea has gotten involved with Women Leaders in Cannabis, a fledgling organization that is local to the Willamette Valley. Their goal is to provide benefits for various causes. So far they have provided Thanksgiving dinners to 22 local families and held a Toy Drive to obtain donated toys for low-income families. In May, the organization held a Mother’s Day family event in partnership with Autism Rocks. Held at a local park, the event included hula-hooping, birdhouse-making, arts and crafts and music.
The industry continues to evolve, making for interesting times. Some of the changes Chelsea has seen so far include increased customer knowledge of cannabis and its effects, and innovation of products. As the industry matures, packaging has become more professional, producers are now isolating terpenes to appeal to different tastes and cannabinoids to provide different effects. Micro dosing of edibles is now becoming more common, as well.
Chelsea is excited to continue this learning adventure. It’s the opportunity of a lifetime.
Cheryl K. Smith is a former attorney and has worked in the medical cannabis industry for almost a decade. She is now “retired” raising miniature dairy goats, writing, editing and serving on several nonprofit boards and chairing the Advisory Committee on Medical Marijuana (ACMM) for the Oregon Medical Marijuana Program.