Are you thinking about jumping into vertical integration as a cannabis business owner? Covering all verticals (cultivation; processing and dispensary) can be very lucrative but it’s no easy undertaking. You will need to be an expert in many different industry types from farming to chemical processing to food manufacturing to retail operations. In addition to needing general knowledge of those highly different business types, the regulations that you face as a cannabis business doubles or even triples the complexity.
Here are a few tips to help you navigate some of the tax and accounting issues you may face:
Accounting
- Keeping intercompany transactions: As money changes hands from your cultivation facility to dispensary, you will need to account for that in a separate account on the balance sheet as a due to / due from payable or receivable between entities. Monthly reconciliations will be necessary to make sure both verticals are showing the correct balance in those accounts and that they are properly classified.
- Related Party transactions and transfer pricing issues: When you transact business with other verticals that are similarly owned, you must operate in the same capacity as you would if the two parties were unrelated. For example, you cannot sell a pound of cannabis for $1,000 to a random dispensary but then sell the same amount to your own dispensary for $2,000. Also, rent charged to related parties must be recorded at market rate. Anything too high or too low will not hold up in the eyes of the IRS.
- Financial presentations: Consolidated financials will be necessary to view the company’s overall financial health. Departmental financials will also be very valuable for management to make sound business decisions on issues like determining profit on cultivation vs processing operations and how to control inventory levels based on supply and demand driven by the dispensary.
Tax
- COGS workpapers: Detailed Cost of Goods Sold (COGS) workpapers will be mandatory to substantiate your 280e tax deduction for IRS purposes. Allocating all allowable expenses into COGS is a daunting task and supporting documentation will be required for every expense item, especially expenses that may overlap between verticals. Missing out on any of these deductions can be very detrimental to your cash flow.
- Sharing Overhead: Verticals may be able to share overhead costs which can result in decreased tax liability if handled appropriately. For example, allocating rent and utilities correctly and proportionately between verticals is key.
- Estimated Payments: Timely and accurate estimated payments are crucial in order to avoid penalties and interest. With many different business types, employees and other taxes due for each vertical, keeping up with tax deadlines can be confusing. It is important to oversee compliance procedures to make certain this is handled properly.
Having a Chief Compliance Officer to oversee company-wide compliance with Federal, State and local compliance is a great idea and having a cannabis expert CPA and CFO to handle the correct cost accounting; generally accepted accounting principles (GAAP) financials and tax issues will set your vertically integrated operations up for success!
Tiffani Higgins is a cannabis industry expert in government regulations and owner of Missouri Cannabis CPA.
