If you talk to an accountant about cannabis, chances are they want to talk about IRS Regulation 280E, which sets certain accounting rules for businesses selling FDA Schedule I drugs, like cannabis.

We talked to four accounting firms recommended by Grown In readers who answered a survey asking about their most trusted ancillary-services companies. Every single one of them had a lot to say about 280E, or something closely related to it.

Jim Marty, Bridge West – website

Jim Marty started an accounting firm in 1984 and “grew it to a nice ten person CPA firm in Longmont, Colorado with, small town clients like construction, dentists, lawyers.” But after medical cannabis was legalized in 2012, he began to take on cannabis clients, and by 2014, “I had over 100 cannabis clients.” Soon after, he split his regular accounting practice from cannabis, and created Bridge West, just for cannabis. It was acquired by a larger firm, BGM, in 2017, now Bridge West is 160 people with over 400 cannabis clients.

With so many clients, Marty sees a certain consistency in the problems cannabis companies face.

“The big gorilla in the room is IRS code 280E, which allows you to deduct your inventory costs but not your overhead. You can find yourself in excess of 100% tax bracket if you’re not careful. You have to sell your product with enough gross profit margin,” he said.

That being said, Marty is very bullish on cannabis industry growth.

“Colorado had record sales of $2.2 billion last year. The cannabis sales nationwide are at about $100 billion. About 40 percent of that is state licensed, legal. We think you’ll have a $100 billion legal national industry in the next two years,” posits Marty.

Barbara Webb, Sarah McGuire, MGO LLC – website

Barbara Webb and Sarah McGuire recently launched a Chicago office for MGO LLC, a San Francisco-based global accounting firm with almost a decade of experience serving cannabis companies.

“On the financial accounting side,” said Webb, “One [concern] we see is calculating inventory for grow or manufacturing companies. A reason our clients come to us is because of how they’re measuring profitability – until they have their inventory costing correct.”

Even when smaller cannabis companies are considered for acquisition or mergers, they suddenly discover they need to have GAAP-compliant financials.

“Part of that is understanding what your inventory costs are on your different strains and products,” said Webb.

“If they are not running a cost-based system, they are running standard costing,” chimed in McGuire. That means, cannabis companies, “are just getting their arms around what are the costs to produce X gram of weed.”

“Once you identify the appropriate costs, it helps you determine your profitability,” said Webb. “It helps you get closer to GAAP-compliant accounting. The sooner you get on board with GAAP-compliant costing per gram, the easier tax compliance becomes.”

Taylor Schuck, Mueller CPA – website

As a college student in Michigan, Taylor Schuck knew something about cannabis. Eventually he asked a dispensary owner if he needed help with bookkeeping. Now, he’s a CPA in Chicago leading up a major cannabis accounting practice.

“We’re heavily involved in Michigan. We do have clients in Illinois and in Missouri. We have some in Arizona, California, and Washington. We’re at a pretty good place where things are moving along for our practice. There’s a lot more competition in the space these days,” Schuck said.

“We work with clients that have internal accountants, and their accounting works well, but sometimes they are not entering things property, without reconciling against statements, or maybe equity is not tracked properly. A lot of these businesses that start up with cash don’t have proper documentation, they have handwritten ledgers of what they spent money on,” said Schuck. “Documentation and proper record taking. Keeping things on file and scanning things in. We do a certain amount of hand holding when we bring on clients.”

Schuck also believes IRS regulation 280E has a broader impact on business decisions than just inventory management.

“Most businesses’ biggest challenge is keeping their SG&A [selling, general, and administrative] expenses as low as possible, because of the non-deductibility [due to Regulation 280E]. The best way to avoid the non-deductibility is to reduce those expenses as much as possible. Which is hard to do in cannabis, when you see all these people doing branding deals,” said Schuck. “In most cases, these royalties are not going to be deductible. What you have to do is, if the product is being packaged, that person should create the package with their name on it, and then sell the package to you. So it’s the cost of the packaging, and you’re not paying the royalty as a package expense.”

Ira Weinstein, Cohn Reznick – website

Cohn Reznick, a national accounting firm based in New York, has a long history of working on affordable housing projects – which turns out to be important for cannabis.

“Cannabis felt very reminiscent of the late 1980’s with affordable housing and when government became important in housing. This is who we are: Creating sophistication in accounting to make the business more affordable, said Ira Weinstein, the firm’s managing principal for cannabis and real estate.

With a real estate background, Weinstein tends to take a long view, since most real estate investment plays require a long holding time. As a result, he sees a lot of cannabis companies without enough focus on fundamentals.

“There’s an over-emphasis on certain tax issues, like [IRS Regulation] 280E and less of a focus on building a high quality business,” said Weinstein. “There are a lot of people that have been around the cannabis industry for a while and have a penchant for the cultivation of the plant and then there’s people that need more sophisticated business practices. People underestimate what’s involved in terms of growing the business, and things move really, really fast. The change is rapid. I don’t know that people appreciate how quickly things change and how much infrastructure you need and how to prioritize it.”

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Editor Mike is an itinerate reporter, recovering political consultant, and strategy game devotee.