There’s an entirely new industry that’s taking the country by storm, one that’s flush with cash and has both great prospects for growth and a built-in need for an unusual level of tax and accounting services. It should be a natural fit for the accounting profession.
There’s just one hitch: It’s illegal.
That’s the cannabis industry’s central contradiction, from an accountant’s point of view: The fact that it’s legal at the state level but illegal at the federal level creates innumerable tax and accounting issues that demand the attention of accounting and professionals – but it creates an atmosphere of uncertainty that puts off many CPAs.
That’s unfortunate, because those who get in on the ground floor and make the necessary effort are likely to find it worth the trouble, according to both industry observers and accountants who have pioneered the field.
“There’s going to be a massive need for accounting services down the road,” explained Chris Walsh, vice president and founding editor of Marijuana Business Daily, a major industry publication. “I realize accountants are by nature more conservative, but this industry is coming out of the shadows, and desperately needs help. It’s becoming a legitimate industry.”
If size is any measure of legitimacy, then the cannabis industry is well on its way. Sales estimates vary widely, but Marijuana Business Daily, which has been estimating the size of the market since 2012, gives a deliberately conservative range of $7-9 billion for legal medical and recreational sales.
“We project that will more than double, and potentially even triple, in the next five years,” said Walsh. “In 2011, sales were around a billion, so the industry has really surged.”
That rapid growth comes from a small base, admittedly – for comparison, consider that the movie industry’s revenues in the U.S. for 2017 were $43 billion, while the video game industry’s were $36 billion. And in 2016, illegal pot sales were estimated at approximately $46 billion.
But legal cannabis is still very young, and it’s quickly spreading across the country, with sales for medicinal purposes legal in 23 states, and sales for both medicinal and recreational purposes legal in 10 states plus Washington, D.C. Michigan just made recreational use legal in the November elections, while Utah and Missouri legalized medical use.
Billions in revenue and rapid expansion aside, cannabis is unique in the depth of its need for accounting services. Oregon-based CPA Andrew Hunzicker, whose DOPE CFO serves cannabis clients and also offers training to accountants, realized this in 2014, when he started focusing on the field: “We hear about the cash issues and the banking issues and the insurance issues, but we don’t hear about the accounting problems. It’s tens of billions of dollars, and thousands of companies, but there’s no Big Four, there’s no industry guidance, there’s no GAAP guidance, and cannabis is very complex accounting-wise.”
Besides the volume of work, there’s also the question of current quality. “Because it developed in an atmosphere of few or no regulations, a lot of these companies aren’t keeping very good track of their finances, and as the industry becomes more mainstream and professional, they’re going to need to get their books in order, or they’re going to be in trouble,” said Walsh.
Cannabis clients can also afford the help they need from accountants. “Just a small dispensary is usually multi-million in sales, and so they have higher revenues -- and can pay higher fees,” said Hunzicker.
Less risk than you think
Pioneering firms may be comfortable in the space, but for many accountants, that conflict with federal law raises too many red flags.
“As soon as marijuana started being legalized, we started getting calls from even large and sophisticated firms about what the risks are: ‘Am I providing a service to an illegal enterprise? Do I have liability? Can I be subject to civil RICO charges?’” recalled Stan Sterna, Esq., vice president and risk consultant for insurance broker Aon Professional Firms.
There are no short answers in dealing with cannabis, but Sterna assured accountants that, first and foremost, serving the industry won’t have any effect on their insurance, as the services firms will be offering aren’t criminal in themselves.
He also suggested accountants shouldn’t let their fears hold them back, pointing out that, while the federal government is standing by its characterization of marijuana as a Schedule 1 controlled substance (the highest classification, putting it on par with heroin and making it illegal to sell or distribute for any purpose), “No one hears about the feds coming in and shutting down dispensaries.”
“We have to wait for the federal government to say something, though their not saying something has achieved a certain result,” noted Dave Roberson, a vice president at Silicon Valley-based accounting firm RoseRyan who heads up the firm’s Cannabis Solution, which launched this spring.
While it was expected that the Trump administration would crack down on marijuana businesses after the inauguration, its initial Attorney General Jeff Sessions said that he would leave the decision to the individual U.S. attorney in each state – most of whom promptly decided to follow the Obama administration’s model of not prosecuting the industry.
The likelihood, then, of federal prosecution is extremely low; what’s more, serving cannabis shouldn’t have an impact on your insurance. And a number of state boards of accountancy have announced that it is ethical for CPAs to serve cannabis businesses, and offered guidelines. (For more on that, see the American Institute of CPAs’ cannabis resources page, at
“Your state is likely going to say, ‘Do what you do for all your companies – vet your clients, make sure they have good internal controls and good processes; do what we all do as a CPA anyway,’” said Hunzicker. ”To date, I don’t know of a single accountant, bookkeeper, attorney, plumber or electrician who’s gotten in trouble simply for serving a cannabis company. Now, can you get in trouble for serving a company and doing it wrong? Yes, but you can get in the same trouble for doing things wrong with a non-cannabis company.”
That’s not to say that the other areas don’t have some risks.
Federal law prohibits FDIC-insured banks from serving cannabis businesses, for instance, which leads to a number of complications.
“Banks are very reluctant to do business with the marijuana industry, because they’d be providing services to illegal activities,” said Sterna. “That lack of bank clarity leads to cash issues, and issues of public safety. It’s a cash business – no credit cards, no checks. They have a lot of cash on hand, and accountants know the issues that go along with lots of cash – a higher risk of defalcation, IRS audits, and so on.”
But Sterna noted that a consortium of 13 state bank regulators has been pressing for a safe harbor for federally regulated banks, and that community banks and credit unions have been working with the cannabis industry with few problems.
What’s more, the general expectation is that time, and the mood of the country, are on the side of marijuana. Sterna pointed to legalization in Michigan as an indicator that the generally conservative Midwest is beginning to shift, and said that support is largely bipartisan.
Hunzicker is even more optimistic, predicting marijuana being delisted from Schedule 1 in as little as 24 months, and that banking issues may be resolved even sooner: “The feds and states get that there’s billions of dollars of legal cash floating around the system, and we need to get that into the banking system, so I think they will quickly address that.”
That doesn’t necessarily mean accountants should take the decision to jump in lightly. “There are firms that are saying, ‘Boy, I don’t want to miss out on an incredibly lucrative opportunity,’ but they don’t feel comfortable taking on an engagement like this – they don’t like breaking the law,” said Sterna. “If your gut tells you not to do it – don’t do it. And don’t dabble.”
That last piece of advice is particularly valuable: One thing everyone who serves or observes the cannabis industry agrees on is that you need to know what you’re doing.
You can’t fake it
From its banking problems and the ramifications of IRC Section 280E (which prohibits businesses from taking tax deductions or credits related to illegal activities), to the vast and varied tangle of state rules and regulations, cannabis requires serious expertise from accountants and tax professionals.
“You need specialized accountants who understand this industry -- you can’t just apply what’s normal in other industries,” said Walsh. “To become involved as an accountant, you really need to take some time – every state operates differently, with a different history, and different terminology. You really need to spend some time researching it.”
Jason Hoffman -- who built a cannabis practice on his own at a different firm, and brought it to New York-based CPA firm Janover, where he’s now a senior manager and leader of their Cannabis Industry Practice Group -- warned other accountants about the steep learning curve in the field: “Don’t just take a client because it’s there, because you’re putting them at risk. Reach out to other accountants who’ve been in this space. Reading a few articles is a start, but for me to be comfortable with my first client took hundreds of hours of research, and then spending lots of time with my clients to understand their businesses,” he said. “We now have thousands of hours of industry expertise and accounting expertise in the cannabis industry, and it took a while to get there. Jump in head first, but make sure you’re able to swim.”
That need for education was what led Hunzicker and co-founder Naomi Granger to start offering training through DOPE CFO. When he first moved into cannabis, “I had to develop my own cost accounting workpapers, charts of accounts – everything you would need for a new industry, because it simply wasn’t there. You couldn’t Google it, you couldn’t call Deloitte & Touche – you couldn’t call anybody,” he said. Over time, he became an informal guru for other professionals looking to serve the cannabis space, answering questions and sharing the resources he had created with whoever needed them.
“Other accountants started approaching me from all over the U.S. I was helping them for free, and eventually the need got so big that we launched a program, and now we have 140 students in 39 states – CPAs, CFOs and MBAs that we’re teaching the correct cannabis accounting and tax,” he said.
The training program is a hybrid – besides access to a host of workpapers, templates, Excel files, engagement letters and other documents, there are also a range of video course materials devoted to topics like cost accounting for cannabis businesses, as well as live Q&A calls every other week. Hunzicker and Granger also answer questions on Facebook every day (though they often find that their students have already answered each others’ questions).
Pricing for the program varies by firm size, but Hunzicker said, “It’s reasonable enough that generally when a student lands one single cannabis client, it pays off the course in one or two months.”
Regardless of whether you take the course or not, he said, “If you want to serve this industry, you want to develop your expertise. Spend at least an hour a day learning not just the tax and accounting issues – you want to learn about the software issues, you want to learn about the bank issues, the operational issues, what products do these people sell, what issues do they have, what are the politics of it, what’s going on with the laws and the regulations.”
It’s also important to make sure you understand each client’s individual situation, suggested RoseRyan’s Roberson. “One of the first things we do is a diagnosis – that’s important to understand,” he explained. “We don’t go in and say, ‘We’ve got the answer, what’s the question?’ We have a lot of questions so we can understand the clients’ problems.”
Beyond growers and sellers
Learning each client’s individual needs points up an often-unappreciated fact about cannabis: It’s a much more varied sector than many think.
“The cannabis industry is much bigger than many people understand,” said Zach Gordon, a senior manager at Janover. “There so many businesses that fill in the gaps, from trucking and security to light bulbs and everything in between.”
From plumbers, electricians and security, to real estate, lighting equipment, chemical extraction, and professional services, cannabis involves a huge array of ancillary businesses beyond the farms and dispensaries.
That ecosystem is in need of accounting and tax services – and beyond them, there is a universe of investors looking for help in this area from accountants. Janover, for instance, offers a wide range of services to marijuana companies, from bookkeeping up to corporate structure, but it also works investors in the space, particularly family offices.
“The internal staff of family offices doesn’t have the staff to do the proper due diligence to see if this a great investment or a terrible investment, and to help them make the best decisions,” said Gordon.
While generally skewing to smaller, less financially sophisticated companies, the industry also include businesses of all sizes and levels of experience.
At RoseRyan, “We decided to focus on all segments of the industry, but the area that I feel has made us popular out there right now is clients looking to scale,” explained vice president of business development Maureen Ryan, who spearheaded the firm’s initial exploration of the space four years ago. “They’re growing rapidly, and they don’t have the talent to scale their operations. Our people are extremely operational – when a company is in hyper-growth mode, you need the ability to plug and play. What you need isn’t always known, and may change in the next 12 months. People in hyper-growth mode or looking to scale quickly, they’re very interested in us, and it doesn’t matter what part of the industry they’re in.” The firm also works extensively with an investors, with whom it’s comfortable from its long work with growing companies in Silicon Valley.
It’s also important to recognize the differences from state to state. “There are several states where it’s just not settled – they’ve established the broad framework and voted on it and there’s the idea, there’s not necessary the execution,” said Gordon. “You have advanced markets like California and Colorado, and brand-new markets like Pennsylvania that are extremely limited in terms of licenses and there’s a bidding process. … This is a moving target – it keeps us on our toes as professionals.”
It’s a community
Mature industries come complete with long-established networks and interconnections; those are still evolving in cannabis.
“Most of RoseRyan’s ecosystems weren’t playing in the cannabis space, so we have to develop another ecosystem to service the area – attorneys, auditors, tax, payroll, insurance – everything you can imagine you’d need to run a business,” explained Ryan; her firm actually began establishing its contacts long before it launched its services officially last spring.
A small world that needs to work together, according to DOPE CFO’s Granger: “We recognized that there was a huge need for a community of people who were specialized in this — in any other type of industry, you can bounce ideas off other professionals, but with cannabis, we had nobody to bounce ideas off of,” she said. “We’ve created this community of all of these professionals with all of these various skill sets, and we’re constantly learning from our students, and partnering with our students to help our clients. So we really need that community.”
The sense of community in cannabis is significantly bolstered by the fact that it faces the daunting weight of federal disapproval, and that, for many, it’s more than just a business opportunity.
“Get involved in your local community – every major city has cannabis advocacy groups, and they have meetings and events,” urged Hunzicker. “If you want to pick this as your niche, get involved in this movement – it’s more than a niche, it’s a movement.”
Accountants can play a unique role in the movement, suggested Gordon: “As CPAs, we can help show that this really is a legitimate business, that it’s not what people typically think of when they think of marijuana. It’s not a black market business — as CPAs, we can certainly help change that impression.”
Changing that impression might also end up changing them.
“I was told I’d become an advocate for cannabis, and I didn’t think that would happen,” recalled Ryan. “And yet, the more you’re in the industry, the more you’ll become an advocate. It just happens. You learn a lot more about the industry, versus the preconceived notions, and all the hypocrisies and inequities that surround this – and you become an advocate.”
