Page 21 - BusinessWest August 4, 2021

Cannabis
Continued from page 19
entities. CBD companies, since they are legal, are allowed all normal business deductions and credits available to other non-cannabis companies. This provides many more oppor- tunities to reduce taxable income to a hemp/ CBD company.
It is not only the federal tax difference which significantly attributes to the dispro- portionate cost of cannabis versus CBD. Due to discrepancies between state and federal law, legal cannabis businesses are forced to operate almost entirely in cash, with very little access to financial services, since most banks are federally insured and therefore unable
to establish accounts for this federally illegal business. This leaves thousands of dollars stored in backroom safes and transported in shoeboxes and backpacks, creating a prime target for crime. Another banking challenge that cannabis businesses regularly face is exorbitant monthly account fees, or banks that take a percentage of each deposit.
The industry faces many other challenges as well. For example, most states have a man- dated ‘seed to sale’ software-tracking system that must be used and accurate (daily), and must be reconciled with POS (point of sale) systems and accounting systems. Additionally, because this is a new industry, many of the tools other industries use are simply not read- ily available, including a cannabis-tailored chart of accounts, QB POS systems, reliable inventory software, and common merchant service platforms.
There is an opportunity for dispensaries
to separate some revenue streams outside of the cannabis division, meaning normal busi- ness deductions are allowed for the non-can- nabis division. These might include clothing, paraphernalia, coffee, CBD, and other goods. While this is good news for the industry, it only creates even more complexities when allocating selling and administrative expenses.
A recent report from the U.S. Treasury inspector general for Tax Administration recommends increased audits by the IRS of cannabis businesses to identify potential non- filers and returns that are not 280E-compliant. For this as well as the above reasons, cannabis businesses need to find an accounting firm that really knows what it’s doing. The can- nabis accountant has to not only understand Section 280E, but also know how to treat a business that deals strictly (and necessar-
ily) in cash. Many cannabis companies have bad books because their bookkeepers do not understand the special accounting and there- fore didn’t properly categorize expenses. It can be time-consuming to fix them.
So, while the many layers of regulatory control and reporting may be of utmost importance to those operating in the canna- bis industry, overlooking the complexities in the finance area of the business can lead to the proverbial perfect storm — or the busi- ness going up in smoke. u
Kristina Drzal Houghton, CPA, MST is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.
Valuation
Continued from page 20
will drastically increase the business’ risk and negatively impact the value. The key to solving this is to develop a solid management team that reduces reliance on one or two key people.
2. Reliance on major customers. This is a significant risk for companies that depend on a few large customers. To increase value, revenues should be diversified. This is also true for companies that depend too heavily on one industry.
3. High employee turnover. This is becoming a growing issue that has affected many industries. These days, it’s hard to find good people, and when a good employee is hired, time and money are invested in that person. High turnover leads to low productivity, increased labor, overtime costs, and time and money to train replacements. A higher-than- industry turnover rate will increase the risk and lower the company value.
4. Lack of investment in the company. This area is also becoming a growing issue as the technology in most indus- tries is rapidly changing. To stay competitive and increase productivity, companies need to invest in technology, machinery, and equipment.
I encourage business owners to think strategically about their exit strategy, usually five to seven years before selling the business, by building a team of valuation professionals to help get the owners where they want to be when the sale does occur. Valuation experts play a critical role in the team and can help in the planning process to ensure that mea- sures are taken to maximize its value. u
Chris Nadeau is director of the Holyoke office of the accounting and tax-planning firm Whittlesey; (413) 536- 3970.
PLAN
Doing things which require commitment and effort says a lot about you. Our commitment and effort to help clients achieve their financial goals has long been part of who we are since day one.
The goals and challenges in life vary in size and scale. Hence, our planning process is one of collaboration, trust, caution, optimism, among other details. Having a plan helps mitigate uncertainty and doubt. It helps clear a path for our journey together.
1500 Main Street Springfield, MA 01115 T: 413-733-5111 F: 413-747-0848
stgermaininvestments.com Member SEC, FINRA, SiPC
ACCOUNTING & TAX PLANNING
AUGUST 4, 2021 21
BusinessWest