3 myths about Marijuana and the financial services industry
The SAFE Banking Act is currently under federal review with the hope banking and merchant services very soon for cannabis companies will ease.
The legal cannabis and CBD/hemp industry has already brought in hundreds of millions of dollars in New Mexico, with thousands of new companies needing financial services and accounting help. The following are the top myths surrounding providing these services to the cannabis and CBD/hemp niches.
Myth No. 1: Accounting for cannabis companies is just like any other niche We are experiencing the birth of an entire industry across the country and New Mexico, including many "sub-niches" like farming, chemical processing, manufacturing of foods and products, distribution, testing labs, retail and delivery companies.
You might even find all of these "verticals" in a single company or organization. There are major accounting and tax issues in these niches. For instance, many vendors will not service companies that operate within the cannabis industry. State-mandated "Seed to Sale" tracking software is challenging to use and doesn't integrate well with cannabis or accounting software, making it incredibly difficult to reconcile and ensure that tracking is in line with internal counts.
Because cannabis is a Schedule 1 drug, U.S. Internal Revenue Code (IRC) 280E says a cannabis company cannot take any deductions or credits on their tax return. They are, however, allowed Cost of Goods Sold (COGS), as COGS is a return of capital and not a deduction or credit. That brings in Section 471, which also involves complex cost accounting that must be done at least quarterly to maximize the allowable COGS on the tax return using 471-11.
Myth No. 2: This is an "all-cash" industry Actually, credit unions and banks serve cannabis companies in many different states. For example, in my home state of Oregon, Maps Credit Union, with more than 10 branches, serves any licensed cannabis company. 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, we will have easier access to banking and merchant services very soon for cannabis companies.
Myth No. 3: Cannabis companies are a "gold mine" in terms of net income Since there are massive taxes on this industry at the national level via Section 280E — as well as heavy state and local taxes — it's actually very hard for these companies to have a net income. Like 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.