building out a cannabis practice with a spin-off entity called act resources.
by liz gold
cannabizcpa.pro
cannabis cpas who are entering this booming industry usually need to figure out how to structure their practice: do they focus exclusively on cannabusinesses? just create a new niche industry practice and hope their clients won’t raise eyebrows? or, create a separate entity within an already established firm?
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for rhodes & associates, the third option made the most sense.
the federal way, wa.–based firm is a group of 22 licensed cpas and a few administrative staff. they have clients in multiple states, who do business in every state. with more cannabusinesses coming their way, they decided to take their more than 270 cannabis clients, including ancillary businesses and related individuals, and create a new division called act resources pllc.
dani espinda, cpa, cgma works as a tax manager at rhodes & associates and she is also the founder, principal and owner at act resources. she was already interested in the growing cannabis industry before she got her first call by referral from an attorney wanting to ask her a cannabis-related tax question. like many cpas, she fields many tax questions from attorneys but his were regarding certain sections of the law, such as code section 263a and 280e.
“we had a meeting, i educated him on the nuances and it snowballed from there,” she said. “and then he started referring me to his clients.” that attorney was having an issue with his client, so espinda kicked off her cannabis career navigating the department of revenue and various tax compliance issues.
while rhodes & associates does offer audit and tax, the services at act are accounting, tax compliance, entity structure and set-up, and business consulting. she helps those considering entering the cannabis space or are at various stages of opening. they come to her, espinda said, to make sure their accounting and tax issues are “really locked in tight,” they are making all the filing deadlines, and meeting record keeping requirements.
“in general, the irs has rules about record keeping but when cannabis was strictly medical, there was the perception and many people were told this, that they shouldn’t keep documentation for fear of federal prosecution. as a tax professional, that horrifies me.”
act started forming in late 2015, and officially launched in 2016, but initially the firm began working with cannabusinesses under rhodes & associates. it was espinda who garnered interest back in 2013 when she was president of the washington society of cpas tacoma chapter. a cannabis cpa came into speak about the industry and it piqued her interest since at the time she wasn’t serving one particular niche.
“that led to an ongoing conversation with that instructor,” she said. “then i started attending business events with the marijuana business association and from there i met other attorneys and potential clients. i also spoke a couple of times, just educating the membership about taxes and then people started calling left and right.”
the reason for the new division is two prong: they didn’t want their current client base to be turned off by their new cannabis practice and of course, the fear many cpas have – liability.
“really the only difference is the name,” espinda said. “associating ourselves with cannabis could be taken the wrong way by our current client base. we have many clients who are very conservative and we didn’t want to create any ill will with this new venture. frankly, i am not a cannabis user, this was strictly a business decision and i saw how underserved this market was by competent individuals.”
espinda said pooling her cannabis clients into one division is a way for the firm to deal with the risk of working with these types of clients. marijuana is still federally illegal and considered a schedule 1 drug under the controlled substances act, which is also a reason many business owners have such a hard time with taxes – as code 280e prevents them from deducting any normal business expenses.
“many clients have grown marijuana for years underground,” espinda said. “now they want to file tax returns but they don’t know much about record keeping and business and we help them with that. we have growers, cultivators, people who do processing, wholesalers, it varies by state.”
and each state is different.
for instance, in washington, getting licensed is a huge obstacle.
“there’s lots of hoops to go through, the licensing process can be very time consuming, thorough background checks, getting to the point where they can open their doors can take years,” she said. “that was a big thing and then it became, now that we are licensed, open and operating, many people were bootstrapping it and undercapitalized. more money was needed to get the business up and running to achieve some sort of success, so people would take on investors.”
espinda said she’s now seeing a more maturing market with many more retail stores and growers and as a result, more corporate divorce.
“we’ve had a handful of clients who have had divorces and we’ve been called by new clients that their business relationship is falling apart,” she said, adding they are asking for help putting their books together.
the firm is proactively marketing but to the right types of clients. these are, according to espinda, clients who consult with them before they act and follow through on recommendations. and of course, they make good on their invoices – which has gotten easier because of the decision to develop retainers for all the firm’s clients.
“everybody is on a retainer,” she said. “we do not do it on a fixed fee, everything is by the hour, we bill against the retainer. it’s like a deposit.”
espinda said during the onboarding process, both parties take the time to get to know each other. they talk about the firm’s services and make sure they understand what the cannabusiness needs, knowing that sometimes things change. payments do come in cash, though espinda said many of the licensed cannabis businesses in washington and oregon have access to banking.
“those clients will send us checks or choose to give us cash,” she said. “we try to keep those cash receipts below $10,000, but it’s not uncommon for me to come in with $5,000 in cash and hand it over to my business manager.”
espinda is not in this alone. the owners of rhodes & associates are also owners in act resources. before she decided to go all in, espinda did her due diligence.
“my firm is behind me 100 percent and that was something that was important to me before i really went out and went all in,” she said. “i am licensed by the state and needed to make sure i wasn’t overstepping any bounds that will put my license in jeopardy. we have very specific requirements and due diligence and standards that we have to meet and i had to make sure working in this space wasn’t going to jeopardize those requirements. it makes a lot of cpas nervous.”
that said, espinda said she finds support in other practitioners in the niche. they meet and talk best practices.
“working with cannabis clients, there are some very specific rules about what they can and can’t deduct. that’s fairly easy but there is still a lot that floats in the gray zone,” she said. “there is still some uncertainty. we don’t have a lot of case law to guide us.”
with close to all of her clients involved the cannabis industry in some way or another, espinda has worked with businesses in oregon, california, washington and alaska and really tries to educate them as they start to navigate the industry. a licensed cpa for 16 years before she took on cannabis clients, today when she tells people this is her niche, people’s interest levels increase.
“cpas need to understand the nuances of cannabis taxes and 280e, and what is appropriate to deduct and what is not,” she said. “i’ve seen a lot of terrible returns which frankly scare me on behalf of my clients because it exposes them to a lot. they must understand the rules and be comfortable with them, understanding there are risks associated with that – for the client and cpa. we have to revisit what we are doing all the time. what worked yesterday might not work tomorrow.”