Bookkeeping For Cannabis Industry Must-knows 4 Proven Best Practices

The US Cannabis Industry

Due to its illegal status at the federal level and as the business is growing fast with a variety of emerging sub-industries, Cannabis companies are facing ever more complex issues that are unique to the industry and require their operators to be extra careful when it comes to keeping their books accurate and organized. Hence, bookkeeping for Cannabis industry best practices is proven to be necessary for businesses in the field.

Let’s go through everything must-knows and best practices about bookkeeping for Cannabis industry in this article!

Banking

Not many federal-regulated financial institutions welcome those who run their business in cannabis as it is still classified as an illegal drug in many states, thus making its risky and problematic reputation. Apparently, the lack of banking options from the beginning subjects cannabis businesses to multiple issues, including internal and external theft, misallocation of funds, payroll, and insurance paid in cash.

It is not totally hopeless to find a bank that can work with your cannabis business though if you are willing to go through complicated application procedures in which regular financial statements must be handed in for reviews. The banks often do this quarterly, but monthly financial records should be ready at any time for submission since it is likely that they will be investigated to support what is reported. The banks will also pay attention to fluctuations in your report, and you don’t want your account to be shut down because you can’t account for such inconsistencies!

Cash flow control

Needless to say, it is challenging to manage cash-only businesses, and those trading in cannabis are no exception. Without a proper tracking system in place, tracking cash transactions by transaction can become a mess. In this case of cannabis – a federally controlled substance, every piece of inventory matters, so any suspected activity may cost the companies their precious licenses or even lead to criminal charges against concerned individuals.

Anti-money laundering

To prevent money laundering, marijuana companies must meet strict requirements regarding accounting and keeping records of every activity and transaction during the course of business, “from seed to sales”, and from suppliers, distributors, retailers to customers. Moreover, for any transaction or a series of transactions that total $10,000 or more in cash, cannabis businesses have to prepare Form 8300 for tax purposes, the filing of which can be confusing with errors resulting in serious fines and audits. 

Taxes

According to Internal Revenue Code Section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” In compliance with this, cannabis-related businesses follow strict limitations when reporting taxable income, with the cost of goods sold being the only deductible expense. Accounting processes, as a result, must implement complete record-keeping to ensure a compliant inventory environment.

Seed-to-sale tracking

 Cannabis business and accountants working in the industry do not often talk about seed-to-sale tracking with much enthusiasm. Every state has its own seed-to-sale system to monitor the production and distribution of Cannabis plants, causing a great deal of confusion for growers, distributors, and other stakeholders involved who need to adhere to changing rules of each local government. 

Specifically, depending on its preference, each state may require a different software system to trace and monitor the plants and finished products from inventory to the point of sale. The three popular seed-to-sale software, Biotrack, MJ Freeway, and METRC, however, tend to have unreliable reporting and it is also difficult to integrate them with existing accounting systems.

Bookkeeping for Cannabis Industry

Bookkeeping is fundamental to accounting, and with all the federal and state regulations that make accounting for cannabis extremely complex, anyone who deals with keeping the books must do it right. 

In particular, bookkeepers should know the ins and outs of Section 280E in the tax code because of its major implications on the business’s actual income and profit. Unlike those working for most small-to-medium-sized businesses, accountants and bookkeepers in Cannabis companies must get used to concepts such as cost accounting, accrual accounting, generally accepted accounting principles (GAAP), and absorption accounting. 

Since many of these principles are not required for everyday small business accounting, a generalist accountant may not be familiar with them. Finding a person with the necessary skill set to keep good records for your cannabis business, therefore, is important in several ways.

Getting ready

Whether outsourcing professional bookkeeping services or hiring an internal bookkeeper, cannabis businesses benefit greatly from having their books handled by people who have experience in the industry. It will be too late to get your accounting system set up and begin organizing your expenses months after the business starts operations. Money is spent on a daily basis, and without proper tracking of day-to-day expenditure and transactions, catch-ups of bookkeeping will turn into a nightmare with a higher tendency of errors. Even for pre-revenue companies, having a comprehensive bookkeeping system in place is essential at the beginning of their journey, when they need to know how much is spent on what before making the first profits.

Raising money

The key to keep a cash-intensive business like Cannabis companies up and running is said to lie in fundraising. Not to mention the difficulty of finding investors who understand the possible pitfalls of the industry, there are a host of components that accountants and bookkeepers can’t overlook if they would like to attract investors to their business. However, it all comes down to the basics such as providing organized books and accurate financial reports that show effective internal controls and accounting policies. There is no one who wants to entrust their money in incompetent hands, and for marijuana businesses that wish to access capital, it is expected that they can express their efficiency in financial management through good bookkeeping practices.

Taxes and deductibles

As mentioned above, under the regulation of IRC 280E, Cannabis companies cannot take deductions from business expenses such as rent, vehicle, and marketing like other companies because their business is related to a controlled substance. Despite this tax limitation, professional accountants can help to legally reduce taxable income by allocating costs to inventory and the cost of goods sold, which is mandated by IRC 471.  

Besides the reputable IRC 280E, there are other tax requirements that accurate bookkeeping can help cannabis businesses fulfill, thus maintaining their license while staying out of trouble with the IRS.

GST/HST and Provincial Sales Tax

Once a proper accounting system is set up with organized bookkeeping practices guaranteed, Cannabis companies can be at ease that they are paying the correct amount of sales tax they are supposed to. What’s more, based on the tax collected it will be easier for them to plan ahead, using the expected tax refunds for business operations. 

Excise duties

Exercise duties, applied at the time the cannabis product is delivered to a buyer, are compulsory for any cannabis licensee. Duties of each transaction must be kept track of, and the higher duty payable must also be reported. Those who own a business in the industry had better have a good grasp of what rules and regulations that the excise duty framework entails to know how to calculate duties or have a reliable accounting team to do this meticulous task for them. Plus, they should do it from early on too before all the transaction receipts pile up or go missing!

Bookkeeping for cannabis industry best practices

Knowing the rules

Whether it is for medical use or adult purchases, businesses associated with marijuana are restricted by countless written and unwritten rules, the sheer number of which may shun anyone wishing to be engaged in this space. Those who overcome the hurdles to take on the role of bookkeepers in Cannabis companies must be well aware that there is no room for ignorance here. Before things can be done “by the book”, first and foremost, bookkeepers must find out what “book” to read. Both federal and state laws have their own specifications regarding cannabis businesses, and it goes without saying that bookkeepers need to know them like the back of their hands to stay compliant. Legality, undoubtedly, is a top concern when it comes to the future growth of the cannabis industry.      

Going digital

As the foundation of good accounting and financial management, bookkeeping is all about being organized. You may have heard about digitized receipt services such as Shoeboxed that help to keep your documents safe, both online and offline, but there are more advantages of applying technology in bookkeeping than you would imagine. 

With brilliant features including verified data that is audit-ready and easily located, customized expense reports, and integrations with a variety of accounting systems, Shoeboxed offers an actionable data tool. Just like any other business, accurate records and transparent accounting procedures are what a cannabis business needs to track its finance and enhance its credibility with the bank and other financial institutions, as well as potential investors.

Shoeboxed provides digital secured quick bookkeeping solution for businesses

Software workarounds

A cannabis company is a complicated entity that involves several sub-industries (farming, chemical manufacturing, food production, and retail), and each requires all kinds of reporting pursuant to the many legislations at the state and federal levels. Another big headache for cannabis bookkeepers and accountants is the buggy seed-to-sale software requested by local regulations. Unfortunately, software that are specifically designed to assist this complicated process are still lacking and don’t work well with widely used accounting systems. 

While looking for more plausible solutions, specialists in the field suggest we make use of current software, combining their functions to serve our needs. For accounting, Quickbooks and Xero are popular choices although some attempts must be called for to create charts of accounts for each business stage. The good old Excel is also a basic tool for cost accounting, reconciliations, consolidations, and so on. If one realizes its versatility and puts decent effort into utilizing its functions, preparing monthly reports or creating accounting templates can become much easier. Finally, the unsolved issues of seed-to-sale software must be acknowledged so that predicted errors can be avoided. Making do with what we have seems to be the right strategy, at least for now.

Checks and balances

Problems with bookkeeping in cannabis businesses are mostly due to the huge amount of cash being collected, which may lead to undesirable consequences ranging from careless mistakes to fraud. There are so many things that can go wrong and result in inaccuracies found in the books when a lot of business activities occur every day. Many of them, however, can be prevented by implementing checks and balances consistently during operations. 

For example, cash counts on a daily and weekly basis can help to identify discrepancies between actual cash on hand and the records in the books. Likewise, sale receipts must be kept carefully and compared to the receipts listed regularly. It is also a good idea to have two people do the cash collection and reconciliation separately to lower the chance of a financial thief. In this way, professional bookkeepers and accountants make a perfect couple who compliments a reliable internal control system.

We have yet to know when the federal legalization of cannabis is coming and how it will change the bookkeeping practices in Cannabis companies. Whatever may happen, there is truth in keeping accurate and organized books for business smooth operations. 

What do you think about the future of the cannabis industry from now on? Do you have more tips on good bookkeeping for cannabis industry to add?

Don’t hesitate to share with us your opinions in the comment section below!

How Does Shoebox Accounting Solve Basic Business Problems?

What is shoebox accounting?

How much time do you spend on finding the physical receipts and business transaction records?

How much space do you spend on keeping these records? 

How much energy do you spend on keeping track of these transactions?

How much trouble do you go through at the end of the tax season to account your expenses? 

If your answer to those questions is quite a lot, I suggest you spend just 5 minutes of your time to know how Shoeboxed services can solve all these problems for you and your business. 

What is shoebox accounting? 

Shoebox accounting is the practice of filling a symbolic shoebox with receipts, invoices, and other accounting documents so that an accountant can sort these out at the end of the accounting year. 

How does shoebox accounting help you increase revenue? 

Shoebox accounting saves business owners’ costs by reducing the stress of keeping accounting records and adding more time to concentrate on growing the business.

Why do you need to use shoebox accounting specialized software? 

Shoebox accounting software such as Shoeboxed reduces the risk of human errors and optimizes the efficiency of the automated accounting system. 

These are the most prominent features of Shoeboxed that make accounting a walk in the park for your business. 

  1. Important receipts and documents are scanned and safely stored at a physical warehouse and in the cloud. You can easily access all the data that you need without worrying about safe keeping the records. 
  2. Key data is extracted from your business records and organized in your account. At the click of a button, you can track all expenses and review scanned images of your receipts. 
  3. Expense reports are simply organized and created catering to your own needs. You can choose to export all or part of your data at any time and have them beautifully downloaded in the format of PDF or CSV files. 

If you are still not sure whether Shoeboxed is a good fit for you, reach out to us at our support center and give it a try completely free of charge.

Maximizing 2016 Tax Deductions: Tips & Tools for Millennial Freelancers

The earlier you organize expenses and keep track of potential deductions, the more money you’ll save in the long run.

Millennial freelancers are a force to be reckoned with and the numbers are there to prove it. According to a national survey from Freelancers Union and Upwork (formerly oDesk), 38% of millennials are freelancing — more than any other generation. Considering that they now make up 45% of entire workforce, this group of 20 and 30-somethings is taking the freelancing industry by storm.

It’s clear to see why. The benefits of being a freelancer align with the lifestyle that millennials seek. They want flexibility, independence and creativity – a perfect formula for a rise in freelancing jobs. But while there are many perks to being a freelancer, there are also stodgy downsides such as complicated taxes and the responsibility of tedious administrative tasks.

Luckily, there are ways to overcome these drawbacks. Tax season may be months away, but that doesn’t mean millennial freelancers can’t start prepping now. The earlier you organize expenses and understand tricks and tips to maximize deductions to make tax season a breeze, the more money you’ll save in the long run. Start sooner rather than later with these recommended tools and tricks:

Research Deductions in the Freelancers Union Tax Blog
One thing freelancers shouldn’t complain to the IRS about is the amount of tax breaks they offer. Tax breaks give freelancers a valuable opportunity to win back money they’ve been spending on their business. It’s also a unique way to encourage entrepreneurship. There’s only one problem: it’s hard to keep track of what’s what, and deductions often change on a yearly basis.

Learn about which expenses qualify for which tax break by reading the in-depth tax blog written by the awesome folks at Freelancers Union. Freelancers Union is a nonprofit organization and insurance company that advocates for the rights of freelancers. Their blog posts are written by freelance veterans and include everything from how to calculate hourly rates to how to write client contracts.

Freelancers Union Shoeboxed

Don’t procrastinate! Use IFTTT for Important Date Reminders
Unless you want to have a very stressful week, don’t wait until right before April 15 to prep and file your taxes! When you take your time to carefully approach filing your taxes, it won’t seem as stressful or time consuming. You’re more likely to make an error or miss out on a deduction if you rush the process.

Eliminate the risk of filing late by using IFTTT. Simply set a receipe that sends a email and/or text reminders on certain dates leading up to the April 15 deadline. This nifty web tool can also help with QET deadline reminders.

IFTTT Shoeboxed

When in doubt, ask for help using sites like NerdWallet
With an endless supply of information, the Internet of things can answer any question you may have related to taxes. Sometimes though, having 10+ pages pulled up with an overwhelming amount of information can make material difficult to comprehend (which is especially true for taxes). Depending on the complexity of your question, it may be best to approach a tax expert or CPA. Tax deductions change often — stay ahead of the curve and make sure you’re taking advantage of ways to save money by asking for help.

Enter NerdWallet, an educational blog that helps millennials make smarter financial decisions by breaking down complex financial information into simple terms. The writers at NerdWallet can tell you exactly which expenses qualify for which tax break as you track your finances into tax season. They also have on-demand financial professionals available to answer your tax questions directly from their homepage.

NerdWallet Shoeboxed Freelance

Organize Your Receipts and Expenses by Tax Category with Shoeboxed
One of the easiest way for freelancers to maximize tax deductions is by staying organized and keeping updated records of receipts, payments and expenses. The IRS demands documented proof for claims, so having everything stored and accessible can reduce a substantial amount of time and pressure. Organization also helps maximize deductions and reimbursements without the hassle of scrambling to find misplaced financial records.

Apps like Shoeboxed let on-the-go freelancers snap pictures of receipts using their phone, which are then digitally stored as IRS-accepted images. Receipts are processed and organized so that vendor, total amount, date, tax category and payment type are extracted and available in a searchable online account. Simply make a note that the receipt is deductible and boom – you have a digital archive of everything you can write off for taxes.

Shoeboxed Freelancers

Use these tools and tips to help make your freelance tax season the smoothest (and most time-saving) yet!