Numbers for Founders

By Mark R. Waller,CPA

One of my earliest mentors in the accounting profession drilled this phrase into my head at a young age: “Numbers tell a story.” While accounting often gets a bad rap for being boring or simply hard to understand, being able to interpret the numbers is vital to business success. I’ve been passionate about helping people understand the story behind the numbers, and it is an absolute thrill to have the opportunity to do this for the hundreds (if not thousands) of future license holders in Minnesota’s regulated cannabis business sector.

Below are the top five most important accounting items cannabis license holders must consider before starting their business, informed by the Office of Cannabis Management’s draft rules and best practices our firm has developed over the years.

Start early

Cannabis businesses should begin their accounting as soon as they start their business operations, ideally even before they officially launch. Early-stage
accounting allows owners to track initial investments, and setup costs, and ensure they meet compliance from day one.

GAAP compliance

Cannabis businesses must adhere to Generally Accepted Accounting Principles (GAAP), which is essential for transparency with investors and tax authorities and the IRS, and find an accountant specializing in cannabis.

Section 280E

This Section of the IRS tax code prohibits businesses involved in the sale
of Schedule I controlled substances, including cannabis, from deducting most business expenses from their federal taxes. At the state level, Minnesota has decoupled from federal tax code and allows owners to deduct ordinary business expenses from their state returns, thus reducing their overall tax liability. Because the implications of Section 280E could change in the future with rescheduling at the federal level, business owners should work with tax professionals who specialize in cannabis accounting.

Cash flow management

Given the heavy cash burden cannabis businesses face during the buildout phase, cash flow must be managed properly to ensure owners can cover the capital buildout costs, and business expenses, and meet tax obligations.

Record-keeping and compliance

Cannabis businesses will be subject to strict regulatory requirements in Minnesota, including tracking sales, inventory, and taxes in compliance with state and local laws. Proper documentation is a major requirement in the OCM’s proposed rules.

By keeping these rules in mind, business owners can successfully navigate the tricky aspects of running a cannabis business.

Mark is the Co-Founder and Managing Partner of Morem & Waller. moremwaller.cpa