This interview is taken from an episode of the Spend Culture Stories podcast. In the month of April 2019, we’re launching a monthly segment that focuses on cannabis businesses and best finance and operational practices. In this episode, Bruce Jolliff, cannabis CPA and Chief Financial Officer for hire shares his insights to establishing internal controls and compliance requirements for tax bill 280E for cannabis CFOs, and why creating a good culture for employees will help bring your business to high growth and profitability.
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What Cannabis CFOs Need to Know About Bill 280E
Cannabis CFO | Chartered Professional Accountant | CFE
In this episode, Bruce Jolliff, cannabis CPA and Chief Financial Officer for hire shares his insights to establishing internal controls and compliance requirements for tax bill 280E for cannabis CFOs, and why creating a good culture for employees will help bring your business to high growth and profitability.
Speakers: Bruce Jolliff
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Can you help us understand the complexities of 280E in a simple way? Why does this make things difficult for Cannabis CFOs and entrepreneurs?
You Must Pay Taxes on Gross Receipts
Generally speaking, 280E is quite straightforward – if you’re dealing in a schedule one narcotic, you have to pay taxes on gross receipts.
But there is an exception – that you can deduct anything related to the cost of goods sold. Meaning, therefore, you can’t deduct a whole bunch of other things. Therefore, with this tax law, you won’t just be arrested because you’re dealing in an unlawful substance, but you’re going to be paying up a ton of taxes. The difficulties from that are that one, you pay a lot of taxes. And two, you still need business. I don’t care what they’re doing if they’re manufacturing, they need to keep books in accordance with GAAP (Generally Accepted Accounting Principles) if they really want to know how efficient and profitable their production operations are. Cost of goods sold for GAAP (generally accepted accounting principles) is wildly different than the cost of goods sold for IRS purposes. So here you have to keep your books and records in accordance with GAAP in order to effectively run your operation.
Auditors Expect Your Books to Be Within GAAP (Generally Accepted Accounting Principles)
And if you’re going to put out any external reports financial statements, say if you have to do audits, the auditors will expect it to be GAAP. The reason why they want it to be GAAP is because that’s what everybody else does. And so when you’re looking at your financial statements and somebody else’s financial statements – they’re similar. For the 280E, you have to go back and take it as kind of a second set of books. What we do right now though since there really isn’t a cannabis accounting platform available for us, we take it out of the platform, the software we’re working with, and we’re putting it on spreadsheets. We take it from the GAAP-basis to now tax bases for all the things that you can no longer deduct.
How does this practice compare with non-cannabis companies?
Accounting Within Books and Taxes are Not the Same
There’s a lot of non-cannabis companies that do this too. A lot of companies have to do a year-end reconciliation from book to tax, for various reasons. They don’t treat their accounting in their books and records the same as they’re going to for the tax return. For example, a simple one is they may do straight line depreciation in their books and records because that doesn’t muddle it up. Whereas for tax purposes, they might be able to get the entire machine off in one year, and that will probably hose up the financial statements for that year – so they don’t do it that way. So this is not unusual. There’s a lot of things that cannabis companies have to deal with. The real complexity is the fact that they can’t deduct an awful lot of their expenses, unless it’s directly related to the cost of goods sold. That’s the realm for cannabis.
What do you think some of the gaps are when it comes to tracking spending in cannabis right now?
Software is Only Half of the Equation – Process Matters
Quickbooks does a great job tracking expenses, and is a great checkbook that’s cheap. However, just recording your checks is only part of the process. You need your operating procedures to know that when you write a check, it’s for something that you really got. It’s also about having the documentation out on the loading dock when something comes in, somebody checks and then they sign off, and it goes to this person. Just having those processes and approval structures in place.
Match Your Books to Your Inventory
And then you have your controls such as inventory control, and make sure that you are counting your inventory on a regular basis (maybe at least monthly), and matching that with what your books and records say.
Get a User-Friendly Tool That Can Be Quickly Onboarded
In terms of tools, I think accounting platforms are going to get better. There are some actually there are some really wonderful ones out there now because obviously we have manufacturing concerns everywhere and we’re talking massive massive dollars in some cases. People are working on it right now. But buyer beware. Check the reviews. Talk to people that have it that have used it. Customer Support. Enormous. How user-friendly is it? Do you have to go to school for three months to learn how to use it? That’s going to be a problem – because you do have turnover, and somebody else is going to have to learn it at some point – maybe immediately. That could be a problem.
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