teach your clients standard procedures.
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even before they were allowed to open their doors, over 2,000 new businesses in michigan were applying for a license to sell marijuana under the state’s new recreational cannabis law effective dec. 1.
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kareyna l. miller, cpa, is a big believer in the medical benefits of cannabis. as michigan went forward with commercial business laws, she started looking into the industry from an accounting perspective. what she saw was burgeoning upstarts working in an environment of financial and legal confusion.
she’d been a cpa since 2011. in late 2016 she founded lc solutions michigan, pllc, a firm exclusively dedicated to serving the cannabis industry. the firm now has a presence enough to reach across the entire state.
she emphasized the importance of focused dedication.
“it has to be a full-time dedication,” miller said. “you can’t reasonably expect to operate in this industry without knowing how many moving parts there are, not just on the federal level but on the state level with the guidelines and regulations they’re coming out with all the time. if you don’t focus all your time, i don’t think you can succeed.”
plenty can go wrong for a new company in a new industry operating under new laws. costs can be relatively high because of irs code 280e, which restricts deduction adjustments to cost of goods sold. state regulations increase costs even further. the cost of liability insurance is relatively high. investors expect a higher rate of return. banks are reluctant to cooperate. it’s complicated and risky and therefore costly.
banking
banking. always a problem in this industry. with pot still illegal at the federal level, banks are more concerned with meeting federal regs and retaining federal deposit insurance than with helping new businesses that are in their eyes still a little bit shady, even if highly regulated, not to mention shaky.
one national bank was so touchy that it shut down lc solutions michigan’s checking account. the arm’s-length, third-party work of a respectable cpa firm was seen as too close to a dubious industry and therefore too risky. it took a couple of weeks to set up a new bank willing to work with marijuana-related businesses and transfer all payment processing, including payroll, taxes and other monthly payments.
the problem is even worse for the cannabis client. an investor may be willing to sink tens of thousands of dollars into a business … but not if it’s cash in a gym bag being deposited into a financial institution not covered by fdic.
the learning curve
startup cannabis businesses have a steep learning curve to climb, miller said, even if the principals have business experience.
“early on, we ran into a lot of messes,” miller said, “clients wanting to do things their own way. so now we have a documented process. we spell it out. the engagement letter explains what we’re going to do for them. from there we have checklists and standard operating procedures, and we train their on-site staff who are going to be part of that process.”
bookkeeping, for example, is a little more complicated than for other kinds of business, mostly because of the 280e restrictions.
“for any accounts that have shared expenses, you want to make sure to break out the ones eligible for adjustment to gross receipts under 280e, segregating what can be considered an inventory cost that can be deducted once that inventory sells. so there is a lot of additional bookkeeping and recordkeeping that go into having separate accounts, separate cost allocation, documentation on how you’re doing those allocations, whether by floor plan or equipment usage or some other reasonable threshold. there are quite a few additional accounts in the chart of accounts that would not be necessary for a non-cannabis business.”
know what you’re doing
“licensees have to know what they’re doing,” miller said. “there’s just too much in terms of compliance and regulation and applications and permissions and the business processes that have to be done. if you don’t have someone who knows business, that should be one of your first hires.”
the cpa firm, too, has a lot to learn.
“firms need to do their research. they need to understand 280e, and not just that expenses are limited for being deducted but how to account for inventories on the back end. there’s guidance from the irs, and tax court cases that firms need to be aware of. they need to participate in state cpa societies. in michigan, the society has a cannabis-specific work group and cannabis-specific cpe seminars.”
preparer penalties
the risks of uninformed work can be substantial, miller said.
“you risk preparer penalties,” she warned. “you risk backlash from the client. you need to do your own due diligence up front and be aware of what you’re getting into.”
miller said that her firm is not out to gouge clients, though some firms, she noted, are doing just that. her firm does build a certain premium into its rates because of the legal risks involved, the need for special liability insurance, and higher worker compensation rates.
“operators need to be careful because there are a lot of firms out there looking to gouge you intentionally. it’s not always a get-what-you-pay-for scenario … i can’t tell you how many returns we’ve had to look at that were prepared by other cpas that weren’t even taking 280e into account.”
lc solutions michigan now has over 200 clients. some are caregivers offering medicinal cannabis, some are existing operators and some are still in the licensing process. the firm itself has four cpas, including one who takes care of clients on the upper peninsula. they also have three bookkeepers, a marketing manager, a report writer and an administrator.
miller doesn’t know of many other firms specializing in this niche. her firm and a couple of regional firms participate in a work group with the state marijuana regulatory agency. she is also working with the state society of cpas to prepare a cpe seminar for cpas interested in offering cannabis-related services in michigan. two weeks before the seminar, more than 90 had signed up.
marketing tactics
lc solutions michigan finds clients through a barrage of marketing tactics. the firm is involved in social media, and the marketing manager attends networking events as often as every week. they study the state’s list of new licensees and send them direct mail introductions. they have a website that makes their focus clear. they are a founding member of cannabiz connection, a statewide marketing platform that extends nationally.
“we spend a considerable amount in our marketing efforts,” miller said. for firms seeking their first clients, she recommends lots of networking. in michigan, there are three or four or more networking events happening every month.
does miller worry about being involved in a business so close to federal offense – the knock on the door, the seizing of funds, the laws in flux?
her answer is pretty simple. she said, “before i got into this industry, i decided not to worry about it. i knew the industry from a personal perspective already and was not afraid of it.”