Budding opportunities for accountants
While a number of accounting firms have dived into serving the cannabis industry, far more are sitting on the sidelines — and whether they’re waiting to see how the pioneers fare, or don’t want to get involved because marijuana remains illegal at the federal level, they’re missing out on a much bigger set of opportunities.
The industry certainly has tax issues (primarily from IRC Section 280E, which forbids most tax deductions and credits to businesses “trafficking” a Schedule 1 controlled substance like marijuana) and all the accounting complications that you would expect of an entirely new crop of startup businesses where no one can claim long-time experience.
“GAAP doesn’t differentiate between a drug and a non-drug — it doesn’t consider Schedule 1 or not,” explained Andrew Hunzicker, the founder of Dope CFO, which serves the cannabis market as well as educating CPAs and accountants in how to work with the burgeoning industry. “You need the right charts of accounts, the right cost accounting templates, and the right tools to do this complex cost accounting, whether you’re a grower, a chemical manufacturer, a food producer, a retailer, labs — it’s all the same.”
But tax and accounting are just the beginning. As a nascent industry with at least some of its roots in illegal markets, cannabis has an enormous appetite for just about every service offering an accounting firm can dream up. “In our program of 400 or so people across the country, there’s an amazingly wide variety of services offered,” Hunzicker said, citing everything from valuations, payroll filing, and human resources services to help with banking, attestations, raising capital, and business structure consulting.
Ryan Prindiville, a consulting partner who works with the cannabis practice at California-based Top 100 Firm Armanino, agreed: “The beauty for us is we’ve been able to state that our services across the firm apply to the industry. Starting out with strategy and roadmap services, or reporting and data analytics systems, to doing operational and people assessments, risk and control assessments, remediation services, and business outsourcing services — all of those apply.”
Given the status of the industry’s main product, it should come as no surprise that the need to comply with a host of regulations is a major problem. “The biggest area outside of accounting and tax is compliance — it’s massive,” said Hunzicker. “You’ve got OSHA, the FDA, the EPA — and then you have all the state regulations.”
In Oregon, for instance, applying for a license to grow in the early days involved an 80-page rulebook, a complete detailing of the ownership structure, a sketch of the property that included the location of the security cameras, and much more.
“Early on in the space, when Colorado, Oregon and Washington were first legal, I saw a lot of attorneys charging anywhere from $5,000 to $50,000 to complete a license application,” Hunzicker recalled. “It’s a little daunting for a CEO, but it’s not that difficult. … It’s a great area to help CEOs with.”
Beyond compliance, the industry also has a large need for technology solutions. “The reality is that the core business needs are the same as any other industry ... each business has functional needs as well as technology needs,” said Prindiville. “Those needs might be for ERP or CRM or HR systems, FP&A systems, and for seed-to-sale systems, but also management reporting and data analytics as well.”
But while many of the needs are the same, the players are not. “You have these new market entrants — it’s not just the same trusted technology partners every other industry has to deal with,” he explained. “It’s not just Microsoft, it’s a lot of new names, and do you trust those new players or not?”
To help on the technology front, Armanino recently began releasing solutions that integrate major accounting software packages with the LeafLogix seed-to-sale software platform. The firm-written Integration Packs work with Sage Intacct, Microsoft Dynamics GP, Microsoft Dynamics 365 and NetSuite.
“Helping with software is another big place to get big fees,” said Hunzicker. “The software issues are daunting — there are hundreds of POS systems, for instance, and most of them are bad. If you implement a POS system in your dispensary and it doesn’t work, it can kill your business.”
“Most cannabis software is five years or younger,” he continued, noting that even the critical seed-to-sale systems that track cannabis from the grower to the final consumer can have major problems. “We’ve got another several years of getting this industry under control. There will be winners in the software space, like QuickBooks or Xero in the general market, but right now it’s the Wild West. We recommend going with the software that’s better capitalized, as they’ll have more resources and more coders, but even that’s not a guarantee.”
Fortunately, many of the businesses in the space are starting to understand the need for better tools and better information. “The owners get it now — they want good data and good accounting,” said Hunzicker.
And that transition from a lower level of business sophistication to a higher level represents yet another area of opportunity for accountants. “We’re finding a lot of clients are going from the black market to the legitimate market, so there’s a lot of opportunity to consult with management there,” said Gary Garbowitz, a partner at Armanino who also works with the cannabis practice. “We’ve put some CFOs and controllers there, and worked on setting up management structures. It’s a big transition with technology and compliance and systems.”
Even in cannabis businesses that started after legalization, the need for hand-holding can be enormous. “In many cases, many organizations don’t have the organizational maturity or internal technology maturity to deal with the complexity that’s out there in the space, because it’s a newer industry, the people are newer, the organizations are newly formed or growing into trying to be as compliant as possible,” Prindiville explained. “The ability to consume and focus is key — many of these companies are just so distracted with the day to day that they can’t consume everything they need.”
“Or they can’t afford it,” Garbowitz added. “The conversion from the black market to the legitimate business, for instance — with payroll and employees, trying to do it the right way and going from independent contract to employees is costly, with employee benefits, overtime and all those other factors.”
Some companies may not want to make the right decisions in those cases, and that means that it’s incumbent on accountants to make sure they know the clients they’re taking on. “The No. 1 thing for us — we do background checks on all of our clients,” Prindiville said. “We are selective about the clients we bring in — we want to be sure they’re the kinds of business we want to do business with.”
He added, “If they’re talking to us, they want to take the right steps, they just don’t know how. They’re asking for help.”
Of course, the notion that potential clients may have shady beginnings, or the fear of dealing with a client whose products are illegal at any level, can be enough to give a CPA pause. For those firms, there’s a different almost-new industry with highly complex (and expensive) advisory and accounting needs that happens to be completely legal. The best part? It’s the same plant.
100% legal — but still complicated
First, a little botany: The cannabis plant contains more than 80 biologically active compounds, with the concentration of each varying by plant. If a plant contains 0.3 percent or more on a dry weight basis of one of those compounds, THC, the federal government regulates it as a Schedule 1 controlled substance. If it contains less than that, it’s not considered a drug and is perfectly legal to farm or sell at the federal level (though it’s still regulated by the Food and Drug Administration).
While these low-THC plants, which are often referred to as hemp plants, have long been grown for certain industrial uses — in rope and textiles, for instance — interest in them is currently growing because they contain CBD, another of those 80 or so compounds that many believe has health benefits, and which is being added to foods and beverages and sold as a supplement.
Interest in CBD hemp is growing at a very quick clip, according to Hunzicker, with a projected U.S. market of almost $24 billion over the next four years. And while it is legal, as an industry, it’s subject to many of the same complexities as its illegal cousin. “There’s a lot of misperception in the marketplace that CBD is legal and you can do whatever you want, and yes, CBD from certain sources is legal under the Farm Bill, but not all CBD, and even if it is legal, you’re still subject to all these provisions,” he said.
CBD hemp producers, for instance, need to guarantee that their plants are below the THC threshold, which can only be determined in a laboratory. They’re also subject to regulations from the U.S. Department of Agriculture, the FDA, OSHA, and the EPA, as well as a host of state rules.
Some of the same Wild West mentality is operating in the CBD hemp space as in cannabis. “There are a lot of shady people out there who say, ‘We can throw anything in a bottle and sell it to a gullible consumer,’” Hunzicker said. “The FDA says it needs to be tested and you should be very careful what you buy. And it can’t be put in food and beverages without FDA approval.”
“There are many products being sold illegally right now,” he continued. “We always want our clients to be following all laws and regulations, and that’s where we can help them, not just in accounting and tax, but in following all these laws and regulations.”
Besides compliance and business advisory services, CBD hemp businesses can benefit from accountants’ tax expertise, as they are also potentially eligible for various tax deductions and credits, and incentives.
Given CBD hemp’s similar service needs, accountants can even look at it as a way to practice for the possibility of a change in federal laws. “Some accountants say, ‘I just don’t want to [serve cannabis businesses] because it’s illegal,’ but they’re happy to serve CBD hemp,” said Hunzicker. “And once you learn that and all those sub-verticals, then once cannabis is legal — and it looks like it’s headed that way — you’re perfectly set up. The accounting is almost the same.”