New Jersey’s Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization (CREAMM) Act allows for the legal sale and use of cannabis and cannabis products for residents 21 years and older. With New Jersey double the size of Colorado in population, and with Colorado being a $2 billion market, you can see this market will likely be very large in New Jersey.
Across the U.S., there are thousands of cannabis businesses springing up, and there are not enough experienced accounting professionals to go around. For those CPAs in New Jersey who may be considering working with these companies, here are the top five myths about providing accounting services to the cannabis and CBD/hemp niches.
Myth #1: Accounting for cannabis companies is just like any other niche.
Actually, with cannabis and CBD/hemp, we are experiencing the birth of an entire industry, including many sub-niches like farming, chemical processing, manufacturing of foods and products, distribution, testing labs, retail and delivery companies. And you might even find all of these verticals in a single company or organization.
The major accounting and tax issues in these niches include the following:
- Many vendors will not service companies that operate within the cannabis industry (e.g., accounting, POS, merchant services, payroll).
- There is a lack of accounting tools, workpapers, industry guides, GAAP guidance and chart of accounts.
- New software in the market is full of bugs, significant periods of downtime, features that don’t work and poor customer service.
- Cannabis companies cannot take any tax deductions on their federal return due to the substance's Schedule 1 status (IRC code 280e). There are legal ways to reduce tax liability, but you must understand the tax codes, including what is allowed and what isn’t for each vertical.
- Cost accounting is required under IRC 471-11 to book inventory.
Myth #2: CPAs will lose their licenses if they serve a cannabis company.
Yes, cannabis is illegal on a federal basis, but it is legal in many states, and these companies need good accounting and tax services.
The American Institute of CPAs (AICPA) has recognized the need for accountants to serve cannabis companies and is on board. For the last three years, the AICPA has hosted a conference of hand-picked experts in the cannabis niche to present key information in an effort to better educate accounting professionals about this grossly underserved segment. If you have any other doubts whatsoever, contact your state board to learn more about serving cannabis companies as a CPA in New Jersey. (You can also attend the next AICPA Cannabis Industry Conference in Boston August 14-16, 2023, where I’m helping to plan and speak at this event. The NJCPA is also hosting a Cannabis Conference on August 2.)
Myth #3: This is an all-cash industry.
Actually, credit unions and banks serve cannabis companies in many different states. For example, Credit Union 1 serves cannabis companies all over the U.S.
That said, there is a lot of cash in the industry, so there is a big need for cash controls and procedures to prevent fraud and theft. Additionally, you will find many cannabis business owners have anywhere from two to 10 non-cannabis entities, such as a real estate or equipment company, and these can have easier access to banking.
The SAFE Banking Act is currently under federal review, and hopefully there will be easier access to banking and merchant services very soon for cannabis companies.
Myth #4: Cannabis companies are a gold mine in terms of net income.
Since there are massive taxes on this industry at the national level via 280E, as well as heavy state and local taxes, it's actually very hard for these companies to have a net income (if they are correctly doing accounting and tax).
Similar to the tech boom, many of these companies will lose money for years. The name of the game for founders and investors is focusing on building brands, growing revenues rapidly, vertically integrating and staying well capitalized. Exit valuations are now based on growth and brand, NOT net income, and will likely be for some time.
Myth #5: Cannabis must be a horrible niche for CPAs.
Since there are so few CPAs in the niche right now, it’s actually a massive opportunity. When you consider that a small, mom-and-pop cannabis business, whether a farm, dispensary or vertical integration, will often be a $10 to $20 million company very quickly, these clients will pay sizable fees for rock solid accounting and tax.
Cannabis accounting is one of the most rewarding industries for those who love the challenge of navigating complex accounting and tax issues, implementing systems and controls and helping clients manage the financial health of their business while maximizing cash flow.
You can get involved with groups like the NJCPA’s Cannabis Interest Group at njcpa.org/groups.