According to a recent demographic report by Headset and published on the website Way of Leaf, the average annual expenditure per person for cannabis and related products is $645, with almost half of cannabis consumers spending between $500 and $2,500 a year. Billions in revenue aside, the cannabis industry is unique in its need for specialized accounting services, as business owners continue to grapple with managing innumerable tax and complex reporting issues, as well as ongoing banking challenges.
As opportunities in the cannabis industry surge, you would expect certified public accountants (CPAs) to be jumping all over this lucrative opportunity, right? Well, maybe not all at once. According to Accounting Today (AT), the fact that cannabis remains illegal at the federal level has made the industry a less-than-desirable client for CPAs, despite the volume of new account opportunities. In 2019, the editor of MJ Biz Daily explained to AT, “There is going to be a massive need for accounting services down the road. [And while] I realize accountants are by nature more conservative, [the cannabis] industry is coming out of the shadows and desperately needs help. It’s becoming a legitimate industry.”
Opportunities for Accounting Firms
As more states legalize cannabis and deem the industry as an essential business, there will be an increased need for experienced CPAs. According to MJ Biz Daily, the following are just a few of the key areas in which cannabis businesses will likely be requiring the assistance of an experienced CPA firm.
Cannabis businesses have reported experiencing audits on a regular basis. Those that are found to be in noncompliance are up against years of litigation, along with significant legal fees and back taxes. CPA firms can properly record and provide supporting documentation to reduce the risk of a cannabis business submitting an incomplete or incorrect audit.
Maintaining current and precise accounting records for a cannabis business is critical when it comes to obtaining an accurate valuation of the company. For example, in the case of a merger or acquisition, an executive of a cannabis operation will want to ensure the business gets the highest valuation possible. This will require buyers looking closely at the business’ books and records as well as its compliance with IRS tax codes, and the company’s brand and market share.
Today, we are seeing more banks opening their doors to the cannabis industry. However, as part of the deal, most financial institutions are requiring detailed monthly financial statements to catch any major fluctuations in revenue. Unless the business has a legitimate reason for any inconsistencies, the account will likely be flagged and could be closed. And because banks are looking at reports at the end of every month, it’s critical that financial records are prepared and ready to hand over when requested.
From meticulous recordkeeping to banking and tax preparation, there will be abundant opportunities for CPA firms to partner with cannabis businesses. As CPA firms recognize the important gap they can fill, we’ll likely see many accounting firms begin to specialize in the very lucrative cannabis industry.
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