Careers with Cannabis: What Cannabis CPAs Want in an Operator

Cannabis CPAs (Certified Public Accountants) are the unsung heroes of a cannabis business. Their expertise can be the difference between a business thriving and the police kicking in the doors. In other words, CPAs are highly valued in the cannabis ecosystem. Thus, it stands to reason that cannabis CPAs often have specific and immutable requirements for an operator before joining an operation. Keep reading to find out what cannabis CPAs want in an operator.

Strict Adherence to Compliance

While it may seem obvious, cannabis CPAs want to know that an operator is in full compliance with all necessary regulations. One aspect a CPA will demand that an operator be compliant with is IRC 280E, which prohibits businesses from deducting otherwise established business expenses from gross income associated with the “trafficking” of Schedule I or II substances. However, there is a rich history in the cannabis industry of operators playing fast and loose with this federal tax code.

Alpenglow Botanicals, a Colorado-based dispensary, did not adhere to 280E, and behaved like a business not subject to 280E.  Ultimately, Alpenglow deducted ordinary business expenses beyond Cost of Goods Sold (COGS) on its federal tax returns. When they were audited for the tax years 2010-2012, the IRS determined it owed $50,000 in back taxes. The dispensary challenged the IRS in court but ultimately lost.

$50,000 was peanuts compared to what Harborside Health Center, one of the largest cannabis suppliers in the U.S., owed the government. When Harborside was audited for the 2007-2012 tax years, the government determined that it owed tens of millions of dollars in additional tax assessments for improper deductions.

These are but a few examples of cannabis operators trying their luck with Section 280E. And while some operators have tried to defend their deductions in court, most have lost, and law professionals warn that the IRS is only becoming more litigious. As you can see, compliance with Section 280E is imperative, and cannabis CPAs will have no leniency for operators who try to skirt this tax code.

Industry-Specific Expertise

It’s no exaggeration to say cannabis CPAs want their operators to have cannabis expertise. It’s like saying you’d prefer the cage to be sturdy when you go shark cage diving. As we wrote in our previous article, “Why CFOs With Cannabis Experience Are Scarce (and Valuable),” cannabis experience is vital in selecting a CFO, and it’s especially vital in a CPA’s decision to work with an operator (or not).

As we described above, an inexperienced operator may try to be lax with Section 280E, as they may be unfamiliar with the necessary tax codes. But inexperienced operators may also lack strong internal controls, such as clear Segregation of Duties (SOD), daily cash counts, and accurate reporting. These internal controls are all crucial facets of a business, as they reduce errors, chances of fraud, and financial misstatements. This trifecta—errors, fraud, and financial misstatements — bears a closer look.

Errors are rampant in the cannabis business. How bad is it? According to a 2021 report by MJBizDaily, 97% of cannabis businesses had errors or adjustments in their tax returns (compared to 79% in other industries).

As cannabis businesses are often cash-only, fraud is rife. According to the Association of Certified Fraud Examiners (ACFE) “2020 Report to the Nations,” the most common type of fraud is asset misappropriation, covering cash fraud, with a median loss of $10,000.

We have already discussed one of the main perils of financial misstatements, i.e., tax audits, but financial misstatements can also lead to regulatory sanctions, tarnished credibility, and cash flow problems. The latter issue is notably thorny. According to a report by Oregon-based Whitney Economics, U.S. cannabis operators had delinquent payments of over $3.8 billion, a problem partially due to improper cash-flow management.

Therefore, it’s no surprise that a cannabis CPA would strongly prefer an operator with cannabis experience, as these businesses would likely be more adept at instituting robust internal controls. And a business with robust internal controls can often head off the myriad issues that can arise in the cannabis industry.

Conclusion

Two of the main qualities a cannabis CPA is looking for in an operator are rigid compliance and prior cannabis experience. With rigid compliance, specifically with Section 280E, the operator is much more likely to survive an audit without paying thousands, if not millions, of dollars. Experience can ensure a business has strong internal controls, which can prevent a host of problems, including the ever-present risk of fraud. While this is an incomplete criterion of what a cannabis CPA is looking for in an operator, these are certainly two of the most important factors.