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Why cannabis companies should work with an accounting advisor

Date: 21 Nov 2018

The cannabis industry is rapidly growing and is here to stay. This market is projected to reach an economic impact of $70 billion in the U.S. by 2021.
Entrepreneurs are taking the leap into the cannabis industry to try to capitalize on this rapidly growing market. And while this is an exciting time for cannabis startups, this rapid growth also brings challenges.

Working with an accounting advisor can be a significant asset for cannabis startups. In this article, we’ll cover key reasons why cannabis companies should work with an accounting advisor.

1. Arranging financing

As a startup, securing financing is imperative. While financing is a challenge for any business, cannabis companies face social taboos and increased scrutiny of their business models, which can make it even more challenging to source funding. An accounting advisor can help identify the right investment banker, advise on funding, and review documentation to ensure their client is protected.

2. Record keeping can be challenging

Many cannabis companies operate across several sub-verticals including farming, food production and retail. With intercompany transactions and cost and consolidation accounting coming into play record keeping can become difficult to manage. An accounting advisor can provide guidance and experience to bring the company’s books up to par.

3. Reduce tax liabilities

26 U.S. Code Section 280E states that a business engaging in the trafficking of a Schedule I or Schedule II controlled substance is barred from taking tax deductions or credits. Cannabis unfortunately falls into this controlled substance category.

This means that cannabis startups cannot deduct businesses expenses to reduce their taxable income and must pay taxes on their full revenue. This in turn leaves less money in the businesses to continue to grow and prosper.

Fortunately, there are ways to structure a cannabis business that can help reduce the amount of tax that will be paid. With complicated tax laws in this industry, this takes the work of accounting and legal advisors to help structure the business, and keep immaculate record keep to be able to file without penalties.

There is no room for error in the cannabis industry; this industry is tightly regulated, and from a tax and accounting perspective, the rules that guide it are complex. For startups, the fate of their business rests on the company being fully compliant with these rules and regulations. Those who do not will face penalization or could be shut down. An accounting advisor with knowledge of, and experience in the cannabis industry can be a tremendous asset to help your company succeed.

At Harshwal we have experience in accounting for cannabis companies and can help you properly structure your business and set up accounting systems that work in your favour. If you’re looking to explore adding an accounting advisor to your team contact us today.

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