Your cannabis business should have a team of professionals and advisors on which you can rely. Our cannabis business lawyers are often asked to recommend accountants who work with cannabis businesses. Like choosing a good attorney, choosing a good accountant is essential to the success of your cannabis business. The right accountant can be a huge asset to your business.
Many cannabis investors own other businesses and may already have an accountant they trust. But because the laws governing the accounting profession do not offer much protection to Certified Public Accountants’ (“CPA”) working in the cannabis industry, some skilled CPAs choose not to work with cannabis businesses, while others simply do not want to spend the time required to develop the expertise related to cannabis business accounting.
Therefore, when evaluating whether an accountant is a good fit you should ensure the accountant has a strong grasp of IRC 280E and cannabis accounting, all while keeping in mind the following three things.
Understand the Types of Accounting Professionals
It is helpful to understand the core skills of the CPA, the bookkeeper and the Enrolled Agent.
A CPA is a Certified Public Accountant. To qualify as a CPA one must take a certain number of accounting related courses, pass a rigorous examination and be licensed in at least one state. Only a CPA may audit, review and give an opinion on a business’s financial statements. The CPA gives assurances (i.e., “certifies”) that financial statements may be relied upon by third parties such as a bank or a potential investor.
The role of the bookkeeper is to review all of a business’s transactions and assemble this information into useful financial information. Bookkeepers also sometimes prepare state tax returns and other government filings.
Another category of accounting professional is the Enrolled Agent (“EA”). The EA may prepare tax returns and otherwise represent clients before the Internal Revenue Service. To qualify as an EA, a person must pass a comprehensive IRS exam or have experience working for the IRS.
Look for Honesty and Diligence and More
This is the baseline for evaluating all professionals. Though it seems obvious, some accountants in the cannabis industry fall short and the below are some red flags:
- Your accountant does not respond to you. Skilled accountants are busy and need to balance their work so all their clients are treated fairly. It may take a skilled accountant longer to complete a project than you wish. However, an accountant that does not call you back or keep you informed simply cannot help your business.
- Your accountant takes shortcuts. This is often marketed as “creativity.” The cannabis industry is fast-paced, takes guts and is highly regulated. It is understandable that you would want to move your cannabis business forward as quickly as possible. Though you may find yourself tempted to “fudge” representations to get things done faster, making misleading statements on tax returns or bank applications or even on your own books and records or otherwise omitting key information will only hurt your business and its owners. A skilled accountant protects its clients from these temptations.
- Your accountant does not understand legal entities. The fundamentals of accounting require reporting financial operations by legal entity, not merely by business group. For example, the same group of investors may own several cannabis dispensaries. If each dispensary operates as a separate legal entity, separate books and records must be kept for each of the legal entities. This is required both for tax reporting purposes and for recording the information necessary to comply with a state’s licensing requirements.
Transactions between commonly owned legal entities should reflect actual business practices and legal agreements and they should be documented with legitimate contracts. It is the legal agreements and business practices that dictate how a transaction is recorded on the books, not the other way around. Recording a transaction as a loan between two legal entities is proper only if supported by a valid loan agreement. Payments between two legal entities for management services must be supported with a management services agreement.
Restructuring legal entities is a function of state law not accounting entries. For example, the merger of two corporations must be reflected in corporate governance documents such as board of director resolutions and filings with the Secretary of State and if such corporate formalities are not followed the merger will not be recognized by state law. Only after the merger is recognized under state law should an accountant record this transaction. Beware of an accountant who records transactions unsupported by legal documentation.
Choose an Accountant with a Strong Professional Network
Skilled professionals know other skilled professionals. A good accountant will look out for your interests and refer you to another professional when appropriate. Accountants can help you with budgeting, minimizing costs, evaluating financial opportunities and complying with tax and financial reporting. However, your accountant should not prepare legal documents or create legal entities. Your accountant also should generally avoid taking a financial interest in your company, underwriting insurance policies, and/or acting as your broker.
A good accountant can help you meet your financial goals. There are many skilled accountants working in the cannabis industry and it is important you find one right for your cannabis business.