Page 19 - BusinessWest August 4, 2021

Where There’s Smoke...
Cannabis Presents Many Financial, Accounting Challenges
By Kristina Drzal Houghton, CPA, MST
The production and distribution of can- nabis, once known to many only as marijuana, is the newest and most
variegated industry in America. Some would even say it is one of the toughest industries in America in which to do business. This article
look at a cannabis plant and a hemp plant side by side, the plants themselves look identical to an untrained eye, making it a bit challenging to identify, as the real difference lies in the chemis- try of the plants.
CBD can be extracted from hemp or mari- juana. Hemp plants are canna-
either fully legalized, decriminalized, or medical- ly authorized. While cannabis is federally illegal, the Internal Revenue Service is perfectly willing to collect taxes on companies that handle the product.
Federal tax law is very punitive on the canna- bis industry. Internal Revenue Code Section 280E is a very short part of the tax code (just one sen- tence) and states:
“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 com- prise such trade or business) consists of traffick- ing 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.”
Under 280E, you’re not allowed any deduc- tions or credits on your return, but you can deduct the cost of goods sold, as that is part of the definition of taxable income. A cannabis farm will only be allowed to allocate various costs, direct and indirect, into cost of goods sold and inventory. Section 280E will affect only cannabis
Cannabis
Continued on page 21
“In 2016, Massachusetts passed a law making all cannabis legal, and all but five other states have passed laws making it either fully legal- ized, decriminalized, or medically
authorized. While cannabis is federally illegal, the Internal Revenue Service is perfectly willing to collect taxes on companies that handle the product.”
bis plants that contain less than 0.3% THC (the compound that creates the ‘high’ sensation), while marijuana plants are can- nabis plants that contain higher concentrations of THC. This article will refer to all products containing more than 0.3% THC as cannabis, while products with less will be referred to as CBD.
So, basically, the only differ- ence from a scientific stand- point is the level of one chemi- cal. However, things are much more complex from a legal and tax perspective. Under the 2018 Farm Bill, CBD and hemp are now legal, and not on the sched-
will discuss a few unique challenges from a financial perspective faced by the industry.
The first complexity starts with the differ- ence between cannabis and CBD. When you
ule I list of controlled narcotics right up there with heroin and LSD. In 2016, Massachusetts passed a law making all cannabis legal, and all but five other states have passed laws making it
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