CANNABIS SERVICES

Every state that permits cannabis operators has ultra-strict guidelines to monitor the operation “from seed to sale” and at each mile marker along the way. Operations require comprehensive systems that allow growers, distributors, retailers, and others to account for all of their revenues and expenses, in addition to the product itself. Even as the cannabis industry accelerates, there remains tremendous uncertainty in the marketplace and changing rules at every level – state, county, and municipal.

In addition to “Knowing Your Customer,” which is required by all financial institutions, any entity doing business in the cannabis space is required to meet certain anti-money laundering criteria including, but not limited to, accounting for cash deposits, having a record of customers, tracking mass shipments to suppliers, and maintaining a record of any red flags which might occur during the business’s normal course of operations.

Including restrictions on the deductibility of expenses under IRS section 280E, which can impact cash flow significantly. Items normally standard as cost of goods sold will be subject to IRS scrutiny, such as employee salaries, utilities, marketing & advertising, routine repairs and maintenance, rent, insurance, and payments to contractors.

Companies doing business in the cannabis arena are required to have extensive security procedures relating to background checks for all current and future employees, Board members, and other stakeholders; safeguards against theft; and procedures to monitor the production and sale of product. Industry operators must be prepared to develop, implement, and annually document all security measures, including video surveillance, record maintenance, and a host of others. The regulations are complex and continuously changing, with states promulgating new rules on an ongoing basis.

Under Internal Revenue Code Section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” Although limited in size, this section has a dramatic impact on the taxability of net income and the ultimate profit generated by any entity operating in the cannabis arena.

Under their federal charters, many financial institutions are unable to accept dollars earned in the cannabis industry, and many of these same banks have begun closing the accounts of long-time customers that have chosen to get involved in this new industry.