IRS Code 280E and More – Top Five Reasons to have World-Class Cannabis Accounting
While IRS code 280E is extremely important to be aware of, there are a number of other areas that Cannabis business owners should look at.
As a Cannabis CEO, you know a lot about running your business, marketing your business, and making money. What should not be lost, however, is the importance of a world-class Financial Planning & Analysis department (FP&A) to help you achieve your goals as a business.
As a list lover myself, I can’t help but share with you the top five reasons you should achieve world-class financial reporting in your business.
#1: It’s The Law!
Under IRS code section 280E, accrual accounting is required unless explicitly stated otherwise in the code. Additionally, only Cost of Goods Sold (COGS) can be deducted from income for federal tax reporting. The IRS has issued a very narrow definition for what can be included in COGS.
In fact, the IRS recently issued a great guide on these key elements of accounting for Cannabis businesses.
Additionally, some local municipalities (such as the city of Boston, MA) are requiring audited financial statements to be submitted on an annual basis.
Without world-class financial reporting, it would be very difficult to follow the law.
#2: Increase The Value of Your Business
Businesses with strong financial reporting and excellent financial information are more valuable to you and to investors.
Producing timely and accurate financial reports, strong internal controls, segregation of duties, detailed policies and procedures, strong electronic record-keeping, and a high level CFO on your side certainly help.
When investors look for businesses to fund, having a strong financial team in your corner gives them confidence that you are a business to invest in.
#3: Lessen the Burden of Audit
Let’s face it–audits are among the most painful parts of running a business. The endless list of information, the questions, the intrusive nature of the work–it’s all very daunting. Without strong financial systems, audits can become downright scary.
With proper planning and a strong team helping to lead the way, audits don’t have to be painful. Strong Cannabis Accounting eases these worries.
#4: Make More Strategic Decisions
Making strategic financial positions without strong financial and accounting information in front of you is like trying to walk through a maze with the lights off. Accounting is truly the language of a business, and yet CEOs often place low value on the function.
A strong Financial Planning & Analysis (FP&A) system (as defined by Gartner) requires strong planning and budgeting, integrated financial planning, management and performance reporting, and forecasting and modeling. With only “ad-hoc” reports generated from a bookkeeper who helps periodically, it is impossible to make truly strategic decisions.
With a strong partner, your bookkeeping function that you feel uncertain about can turn into a strategic partner in your business, providing you with excellent information along the way.
#5: Increase Value at Exit
Eventually, you likely will want to exit your business. When that happens, businesses often require audits, extensive due diligence, and deep, accurate information given to many stakeholders.
With strong accounting and financial reporting systems in place, getting this information can be a breeze.
Without it, your exit can be much less lucrative than you had hoped.
How to Build a World-Class Finance Department
The first step is to find a high quality outsourced CFO who will join your team on a part-time basis. Hopefully they will have a CPA designation and many years of experience working with many different types of businesses. More importantly, a CPA who has the infrastructure in place to assist specifically with Cannabis Accounting and 280E compliance is key.