The cannabis industry is unique in comparison to similar personal consumption industries in that cannabis is labeled a Schedule I substance. As a result, the industry has unique constraints that include:
- Product not being able to cross state lines
- Heavily regulated federal reporting requirements
- Limited access to banking
Perhaps the most significant constraint relates to how cannabis companies are taxed—on their gross profit. As a result, understanding month-to-month tax liabilities is exceptionally important for determining profitability.
The Accounting for Green Approach to Consulting with Cultivators
Accounting for Green has a well-earned reputation for excellence when it comes to financial advice for cannabis businesses.
With a deep understanding of the cannabis industry and its reporting requirements, we partner with cannabis companies at every stage of business ownership. We blend strategic advice with tactical know-how to help each business align their financial processes and operations with business goals.
The single most valuable piece of advice we give cultivators with a provisional license is: start building out your cost accounting and projected profitability as soon as you can.
Understanding Your Month to Month Tax Liabilities as KPIs
For cannabis companies — pay tax on the gross profit.
- Understanding your tax liabilities for each month to put this into savings and make reasonable estimated tax payments
- Allocation of cost of goods sold
- Documenting allowable cost of goods
- If your monthly tax liability is more than net profit then you need to make adjustments in your operations to achieve overall profitability.
Determining Cost of Goods Sold (COGS)
We tell all cannabis companies to keep track of all components that go into cost of goods sold.
- For cultivators, this relates to the cost of growing products
- For manufacturers, it relates to the cost of developing and packaging products.
- For dispensaries, it is limited to the cost of products purchased for resale.
We recently published this use case on helping cultivators evaluate their grow costs to ensure profitability from the very first sale.
Understanding What is Allowable in COGS
Because of the Schedule I substance status, cannabis businesses cannot write off many expenses that most businesses can. We partner with them to evaluate their expenses and establish cost accounting so they can understand where profitability needs to be able to pay taxes and remain profitable.
We recently published this use case on building a network to maximize your provisional license. While specifically for dispensaries, much of the information is relevant to cultivators.
Evaluating Your Monthly Tax Liabilities Helps You Stay in the Green
By helping cannabis businesses establish good accounting and cash management processes, we can help them forecast tax liabilities. In turn, they can set that amount of cash aside, so when it comes time to pay local, state, and federal taxes, they’re not dipping into current operation cashflow, disrupting daily operations.
Accounting for Green consults with up-and-coming cannapreneurs as well as established businesses on best financial and business practices. They come to us with their big ideas, and we help them understand and explore the financial and business ramifications of each of them. In fact, we frequently tell them, “just because you can, doesn’t mean that you should.”
We’d love to talk with you.
Contact us today to start exploring your big idea or get financial expertise to build a profitable cannabis business.
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