The legal cannabis industry is booming. With more and more states legalizing marijuana for medical and recreational use, new cannabis dispensaries are opening their doors at a rapid pace.While the opportunities are vast, there are also significant challenges, especially in accounting. Unlike traditional businesses, dispensaries face unique restrictions and complexities that can make financial management a minefield.Here, we'll explore the four most common accounting challenges new dispensaries encounter and provide solutions to help them overcome these hurdles and achieve financial success.
Challenge #1: Banking in a Cash-Dominated Industry
Federal restrictions on cannabis prohibit most dispensaries from accessing traditional banking services. It forces them to operate primarily on a cash basis, creating many problems. Cash flow management becomes a logistical nightmare, with challenges like:
- Security Risks
Large sums of cash on hand make medical cannabis dispensaries prime targets for theft.
- Inefficiencies
Also, daily deposits and armored car services eat into profits.
- Payroll Difficulties
Additionally, paying employees and vendors with cash can be cumbersome and error-prone.
Solution
While full federal legalization would be the ideal solution, there are steps dispensaries can take in the meantime:
- Partner with a Cannabis-Friendly Bank
A growing number of credit unions and smaller banks cater specifically to the cannabis industry. These institutions understand the challenges and offer limited banking services.
- Cash Control Procedures
Aside from that, they should implement strong internal controls to minimize theft risks. Consequently, it includes daily cash counts, designated cash handling personnel, and secure medical cannabis dispensary storage facilities.
- Cashless Payment Systems
It’s also good to explore alternative payment solutions like prepaid debit cards or cryptocurrency (where legal).
Challenge #2: Navigating the Labyrinth of Cannabis Tax Laws
Section 280E of the Internal Revenue Code throws a major curveball at cannabis businesses. Unlike most industries, dispensaries are generally prohibited from deducting average business expenses from their federal taxes.It significantly increases their tax burden and makes financial planning a challenge.
Solution
While there's no magic bullet for 280E, here are strategies to optimize your tax situation:
- Work with a Cannabis-Experienced Accountant
You must first find a CPA specializing in the local cannabis dispensary. These professionals understand the nuances of 280E and can help you identify any available deductions and credits.
- Focus on Cost of Goods Sold
Since the cost of goods sold (COGS) is one of the few deductible expenses, focus on optimizing your cultivation, production, and inventory management processes to minimize COGS.
- Stay Up-to-Date on State and Local Laws
Tax regulations for cannabis can vary significantly by state and locality. Stay informed about any potential tax breaks or incentives offered in your jurisdiction.
Challenge #3: Maintaining Accurate Inventory Tracking in a Regulated Environment
Strict regulations require medical cannabis dispensaries to track their inventory from seed to sale meticulously. It includes:
- Detailed Records
Maintaining accurate weights, strains, THC percentages, and other relevant data for all cannabis products.
- Compliance Software
Investing in specialized seed-to-sale tracking software ensures you meet all regulatory requirements.
- Regular Inventory Audits
Conduct internal audits to identify discrepancies and prevent shrinkage.
Solution
Here's how new dispensaries can build a robust inventory management system:
- Invest in Seed-to-Sale Technology
Implementing a compliant seed-to-sale software streamlines inventory tracking, automates reporting, and ensures regulatory compliance.
- Standardize Inventory Procedures
Develop clear and consistent procedures for receiving, storing, and dispensing cannabis products. Train all employees on these procedures.
- Regular Reconciliation
Regularly reconcile your inventory records with your cannabis online dispensary’s physical inventory to ensure accuracy.
Challenge #4: Mitigating the Risk of Audits
The IRS heavily scrutinizes cannabis businesses due to 280E and the cash-intensive nature of the industry. The risk of audits is significantly higher compared to traditional companies.
Solution
Here's how new dispensaries can minimize the risk of audits and prepare for them effectively:
- Maintain Impeccable Records
Keep meticulous financial records, including receipts, invoices, bank statements, and inventory logs.
- Work with a Qualified Tax Professional
Partner with a CPA with experience representing cannabis businesses before the IRS.
- Develop a Response Plan
Have a plan for responding to an IRS audit. This includes designating a point person and having all accounting for cannabis dispensary documentation readily available.
Current State of the Industry
The current state of the cannabis industry is a mixed bag. There's significant growth but also hurdles to overcome. Here's a breakdown:
- Market Boom
The legal cannabis market will reach nearly $80.1 billion by 2031. It indicates a massive potential for new markets and existing businesses.
- Job Creation
A report by cannabis job platform Vangst, as cited in Forbes, states that the legal cannabis industry experienced a 5.4% increase in workforce in 2024. Hence, it adds 23,000 new jobs, bringing the total to 440,445 local cannabis dispensary full-time jobs.
- New Markets
Legalization is spreading, with more states approving recreational and medical marijuana use. It opens doors for new dispensaries and businesses across the country.
Work With the Experts
Unleash your dispensary's full potential. Safe Harbor Financial offers secure banking solutions built for the cannabis industry. Partner with the experts to navigate cash flow challenges, streamline payments, and achieve financial clarity.Visit Safe Harbor Financial today and focus on cannabis dispensaries’ growth, not banking hassles.