There is a lot of money involved in the cannabis industry. As more and more states legalize cannabis for medical or recreational purposes, there's a growing number of cannabis companies that need the advice of good accountants. Will that be you? It could be!
If you’ve ever thought about growing a cannabis practice at your firm, or maybe you’re already starting to, there are a few things to think about and be aware of. It starts with determining if a cannabis practice is right for your firm, and that is not an easy question to answer.
“Just like with all great accounting questions, the answer is [that] it depends,” said Zach Gordon, cannabis practice leader at New York-based firm Grassi & Co.
There’s no question this is a growing area, Gordon explained, but every firm and professional are different. There is also a lot to understand about state-by-state guidance and individual markets, and that even though cannabis may be legal in a state, federally it’s still illegal. “[Accountants] still have to act like it’s an operating business, because, well, it is,” Gordon said.
Next, you have to look at if your cannabis practice would focus more on distribution or the growers and farming aspects. The economics of those sectors are different, and there are more complex accounting measures to consider with cannabis farms. There’s manufacturing, distribution, retail and wholesale. In other words, a lot of different avenues beyond just the industry vertical.
Firms have to buy into a cannabis specialty
If cannabis is legal in your state, it’s really not that much different from a liquor store. Beyond that, though, retailers need a license to operate — it's not like just anyone can open a cannabis dispensary. But there are understandably mixed feelings about it. There will probably be partners who don’t want cannabis associated with the firm for one reason or another.
“There’s no question [that] it’s a challenge,” Gordon said. “There are a lot of historical thoughts as to what cannabis is or who uses it and what it looks like.”
And while continual education will gradually shift the tide, there will always be some people who will not evolve, which is OK.
There is this economic conversation that kind of has to happen though where some clients may already be in that space. Whether it’s a family office or high-net-worth clients deploying capital or working with equity, a lot of firms might already be part of the cannabis space whether they realize it or not. When accountants begin to look at what’s already happening within their own client base, the conversation kind of shifts to the economics of what they should be providing to fulfill existing opportunities.
“Be willing to have frank discussions with people,” said Gordon. Cannabis businesses also are not that much different than other cash-heavy businesses in terms of reporting, accounting and taxes. “It’s a 30,000-foot comment,” he said, “but if you’re doing an audit of cash and cash accounts, the procedures aren’t completely dissimilar from a gas station, for example.”
It’s more about developing a level of comfort with the idea of possibly walking into a vault where there are millions of dollars stacked up — something Gordon has seen.
Even though cannabis is still federally illegal, the
Clients make cannabis appealing
“If you’re not having a good time with cannabis, you’re doing something wrong,” Gordon said. There are a lot of really interesting people in cannabis. There are true entrepreneurs, those who have a bit of retail experience, and those who have a business sense. CPAs can do a lot of good for them. “They need a trusted advisor,” he added.
There are a lot of taxes in the cannabis industry, maybe enough in sales and excise taxes alone to keep a tax department busy. And they need help understanding the requirements to stay on top of reporting. It’s a really good place to be in.
Another great area to advise cannabis operators on is documentation. It’s especially important for growers on the agricultural side, where the cost of goods sold allocations get very interesting. What if an authority wants to do an inspection? If that grower doesn’t have any sort of documentation to prove the why and how, it’s not a good situation. “This is something I stress a lot,” Gordon said, because it’s “an area where there’s a significant opportunity.”
The cannabis business decision
Keep in mind that cannabis is being legalized in more states and will probably eventually be legalized federally. CPAs are really great advisors to help clients work through those changing regulations, so it makes sense for the industry to engage with this niche. And the
It’s also important, according to Gordon, to make sure your insurance providers or governmental contracts know that the firm is doing cannabis accounting work. Being upfront prevents any uncomfortable surprises or awkward conversations later.
There can be a lot of flexibility and creativity in building a cannabis practice, which are two things that accountants don’t often get to experience, right? There are very few tax court cases to date and very few precedents so, if the accountant can go in and show reasonable support, there are a lot of benefits to both the firm and the client.
“It is a lot of fun; it really is,” Gordon added.
Cannabis accounting can potentially be a lucrative business opportunity for accounting firms. To do it right, they have to play to their strengths — be it audit, tax, consulting, whatever — and research the heck out of it. Every market is different, every state is different, and there are a lot of nuances in reporting standards. When it makes sense, it can be a really great business decision for the firm.
