why the industry is in a sweet spot right now.
by liz gold
cannabizcpa.pro
here’s a piece of advice for accountants and cpas in the cannabusiness industry – don’t get hung up on 280e.
that’s right, you read correctly.
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at least, according to dean guske, cpa, mst and owner of guske & company in bellevue, washington.
“the big overriding elephant in the room is code section 280e,” said guske. “great. it’s one code section. the rest of the internal revenue code applies to you as well. so, to get fixated on that section isn’t going to really help you solve your clients’ problems. there are other issues you have to be aware of.”
guske, who is one of the first accountants to take on cannabis clients, said it’s critical for cpas to really understand the industry, including the unique impact 280e has on growers, processors and retailers.
“you have to go in through the out door and look at things a little different than a normal small business,” he said. “most small businesses would never use a regular c-corp to run their business because they are concerned about the effects of double taxation. but in the cannabis industry, that makes a lot of sense in a lot of circumstances, so you have to know why and when to use that.”
guske has managed his own firm for 25 years, working in private industry and as a managing director of a real estate development company. in 2012, when washington’s market was still medical-only, he started getting approached by people who knew the recreational program was coming and wanted to get prepared.
“i got in by accident,” he said. “i helped a person who had a construction business and he had some tax issues. i helped him resolve them and he says, ‘i want to tell you about my other business,’ and it was cannabis.”
essentially, the client was a grower who didn’t know how to pay his taxes and wanted to avoid breaking the law. so, guske helped him. and then he started working with processors and dispensaries and his practice snowballed from there.
“our growth in client size was off the charts,” he said. “it was hard to keep up with.” in 2018 as compared to 2017, guske said his firm experienced 20 percent growth, which is about as low as it’s been in the last eight years.
“it’s on purpose, just because of the nature of what’s going in the industry right now,” he said. “there is a shakeout going on, particularly in washington and oregon. it’s a very competitive industry so you have a lot of smaller players going out of business. you’ve got companies combining, companies going public. so, the clients are getting larger, more sophisticated and they have needs that are more than just what are the cannabis tax rules.”
guske said he doesn’t help anyone through licensing, as he sees that more as a legal issue. “i stay in my lane; we are a tax and advisory shop. i’m not a lawyer so i don’t give legal advice.”
today, he has about 400 clients in the cannabis industry in several states. early on, because there weren’t many cpas servicing the area, he was taking on clients of varying size.
during those days guske wanted to help people and he liked being around entrepreneurs. now, his clients have matured, and have complex tax and accounting issues as a result. many of his newer clients are coming to him because they’ve gotten poor advice from other accountants who are not as well versed in the industry.
“i’m in mr. fix-it mode with several clients,” he said. “they’ve got irs problems, state problems, just general accounting or business structure problems, so i’m really spending intense time up front to get them positioned to be successful again.”
guske also pointed to other clients who are engaged in mergers and acquisitions, purchases and sales, and reorganizations. and yet others who are in the process of going public.
“that part is pretty exciting,” he said. “i just got off the phone with a whole team of people, including investment bankers and attorneys, and my client is doing a multistate rollup and trying to go public in canada. it’s pretty interesting work. never a dull moment.”
but here’s the thing – this niche is like any other niche you get into, guske said – “you better do a damn good job of educating yourself in the industry. you have to know how the industry works, what businesses put the industry together. you have to have a good understanding of that and you have to have enough experience with tax issues.”
guske has 10 full-time employees in his washington office and he’s happy with that setup. most of his clients have come from word of mouth or referral.
“bigger firms are getting in because the smart ones are seeing that eventually this is going to be legal not only in the u.s. but worldwide in the next 10 years,” he said. “and if you make your mark early and establish yourself, you are going to have a pretty solid niche in a real business. you’ll see national firms and regional firms definitely get in. cpa firms have tons of resources for businesses and who better to serve this entrepreneurial niche?”
as the industry evolves, guske said he’s seen the sophistication level of the participants dramatically increase – such as better management teams and business owners with more capital.
“people complain about the federal legality and the disadvantage 280e gives you from tax perspective, but i look at it and say listen, you are in a sweet spot right now, the states are heavily regulating you because they have a conflict with the federal government, and that regulation is keeping these businesses middle market at best,” he said.
once the industry is legalized, small cannabusinesses – those with less than $50 million, which are the majority – will fall away because of larger corporations and pharma. “you might hold on as a niche brand,” he said, adding, “the regulatory and tax environment is giving people an opportunity to have a business. i can’t predict the future, but i can say if you take away the restriction on interstate commerce and remove 280e, i think all of a sudden you are going to have a lot of big capital come in to take advantage of the space and a lot of people will be left by the wayside.”