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Preface: Any cannabis accounting information or any other information provided in this article should not be construed as Tax or Legal advice. Specific Tax and Legal strategies for your business should be discussed with your Legal-Council, CPA and/or Accounting Team.
Taxes and reporting compliance can either be a major burden or a well-managed advantage for cannabis business owners. From income tax and Section 280E to excise, sales taxes, and Form 8300 reporting, navigating regulatory requirements is critical to avoiding penalties and maintaining financial stability. With constantly evolving state and federal regulations, cannabis businesses must implement proactive strategies to stay compliant. The key? Surrounding yourself with a team of experts. In the sections below, we’ll highlight common compliance challenges and proven strategies TGG has seen help businesses succeed.
Key Takeaways
- Avoid the alter-ego assessment by setting clear structure around servicing and licensed entity arrangements.
- Legal, Tax and Accounting should work together and not in silos from each other
- Legal for Entity formation, Operating and Servicing Agreements
- Tax for structure recommendations and opining on structure of agreements for 280(e) strategy
- Accounting to fulfill on the goal entity structure, maintain operational tax and accounting goals.
- Legal, Tax and Accounting should be meeting every 3-4 months to check in on success and adherence to tax strategy.
- Dodge the Cash Cliff by maintaining a 13-week cashflow and paying tax on-time
- Train Cash-handlers on processes that they will take part in (specifically 8300 processes)
Joe Johnston, TGG Consulting Senior Controller
What Is Cannabis Accounting and Why Is It Unique?
Cannabis accounting is the specialized financial management of businesses operating in the legal marijuana industry. Unlike traditional industries, accounting for cannabis businesses is heavily regulated due to federal prohibition and state-specific laws. Accounting for marijuana dispensaries requires compliance with Section 280E, which limits tax deductions, making tax accounting for cannabis businesses more complex. Additionally, strict inventory tracking and cash-heavy operations create unique challenges in accounting for cannabis businesses, requiring meticulous financial reporting and adherence to evolving compliance requirements.
Key Challenges in Cannabis Accounting
- Tax Limitations Under Section 280E – Marijuana accounting is affected by federal tax law, which disallows most deductions except for Cost of Goods Sold (COGS), significantly increasing tax liabilities.
- Complex Regulatory Compliance – The accounting in the cannabis industry varies by state, requiring detailed financial reporting to meet state and federal regulations.
- Limited Banking Access – Many cannabis businesses operate primarily in cash due to banking restrictions, making financial tracking, fraud prevention, and tax reporting more difficult.
- Inventory Management & Compliance – Dispensaries must meticulously track cannabis inventory and COGS to comply with state marijuana accounting laws and optimize tax deductions.
- High Risk of Audits – Tax accounting for cannabis businesses is highly scrutinized, making accurate bookkeeping, financial documentation, and audit preparedness critical.
Income Tax, 280(e), and 471(c) in Cannabis Accounting: Set Organizational Strategy, Document It, and Revisit Often
For tax years beginning on or before January 4, 2021, cannabis business owners have often utilized a management servicing-entity legal strategy. In this formation, licensed cannabis business would perform ordinary operations and earn Revenue, and incur COGS and Operating Expenses for financial purposes. However, under IRC 280(e) these licensed cannabis businesses would not be able to deduct any expenses other than Cost of Goods Sold in determining taxable income. This would result in a business that may have otherwise had a 10% net profit margin, now be charged tax based on a 50% gross margin.
This is where the management services organization comes in. A Management Company would be organized to provide services typically considered operating expenses (professional services, insurance, etc.) to the licensed cannabis business and charge a management fee to the licensed entity. In this strategy formation, the licensed entity would then be able to inventory the expenses and management fee under IRC 471© (allowing businesses generating under $25M in revenue to account for inventory in any method so long as it is well documented) and expense them through Cost of Goods Sold.
This specific general strategy discussed above would often be recommended and organized by a combination of legal council and a trusted CPA. While tax laws surrounding the use this structure may expire, the success or failure of compliance will be helped by several factors. Accounting and Tax should be meeting quarterly to check in on success & adherence to tax strategy and make any adjustments mid-year based on estimated tax burden.
Avoid an “alter-ego” assessment
- Maintain separate bank accounts, cash vaults, financials for any licensed or servicing entities.
- Operate the management service entity to provide services to other businesses and third parties
- Ensure vendors open accounts and bill appropriately. Ie: Cannabis-specific activities (such as purchases of inventory) can and should only be directed towards the licensed entity.
How to Structure a Cannabis Accounting Department for Success
- Hire a Cannabis Accounting Expert – Professionals experienced in accounting for cannabis businesses can navigate 280E tax rules and compliance requirements.
- Implement Internal Financial Controls – Strict policies for cash management, expense tracking, and payroll processing help prevent financial mismanagement.
- Use Cannabis-Specific Accounting Software – Software like Greenbits, Flourish, and QuickBooks for cannabis accounting helps dispensaries track sales, taxes, and inventory.
- Maintain Accurate Tax Documentation – Proper bookkeeping ensures compliance with tax accounting for cannabis businesses and protects against IRS scrutiny.
- Monitor Cash Flow & Tax Obligations – Proactively managing financial reserves helps prepare for high tax liabilities unique to marijuana businesses.
When to Consider Outsourced Accounting for Your Cannabis Business
Managing accounting for cannabis businesses is challenging due to complex tax regulations, compliance requirements, and cash-heavy operations. If your business struggles with financial management, tax compliance, or audit readiness, it may be time to consider outsourcing to experts.
At TGG Accounting, we specialize in cannabis accounting, helping businesses navigate tax accounting for cannabis businesses and stay compliant with ever-changing laws. Our team of seasoned professionals ensures accurate financial reporting, maximized tax efficiency, and risk mitigation.
With years of experience in marijuana accounting, we understand the unique financial challenges of the industry. From optimizing COGS allocations under Section 280E to ensuring your dispensary remains audit-ready, we offer tailored accounting solutions that protect your bottom line and drive growth.
- Expertise You Can Trust: Our accountants stay ahead of industry changes to keep your business compliant.
- Customized Solutions: We provide financial strategies tailored to your cannabis business’s needs
- Audit Protection & Tax Efficiency: Our strategies help reduce liabilities while keeping your records secure.
Legal Counsel, CPA and Accounting for Cannabis: When and Where to Pull Them In
Optimizing tax strategy in cannabis businesses requires trusted advisors in Legal, Tax and Accounting. Any cannabis business plan will have (or should have) included financial modeling lead by the CEO that includes input from Cultivation (or Supply Chain for Distribution/Retail), Sales, HR and Accounting amongst other departments. Having Accounting involved in this component of business planning will provide targets for Standard Cost per Pound, Average Price per pound (or eighth/gram for retail), and begin building financial strategy for Cultivation and Excise Taxes.
Once the business has an effective financial model and target profitability (EBITDA) is set the CEO will have more tools in working with Capital and Debt Partners based on their strategic and financial goals. At this point, Legal Counsel and CPAs should work together to advise on appropriate legal structure for the business based on the goals of individual Partners and legally minimize tax obligations. At this point Legal Counsel should be writing Operating Agreements and Management Service Agreements that allow for flexibility in management services to be provided to a licensed entity and markup rates charged.
As the business is in day-to-day operations, Accounting should take the lead again to perform the following:
- Outline and schedule Cannabis Cultivation, Excise, Local and Sales tax flow
- Gain access to CDTFA (or other state jurisdiction) for Cultivation (ending 6/30), Excise and Sales Tax Filings
- Gain access to City/County tax jurisdiction filing system
- Register to file with the BSA for 8300 filings (for Cash receipts over $10,000)
- Begin Tracking, retaining cash for payments, and filing on time.
Gross Receipts vs Tax Withholding
A mistake that is seen in the cannabis industry is that Distributors and microbusiness will charge Excise but treat as receipts on revenue and “borrow from Peter to pay Paul”, or in this case (delay paying Excise to CDTFA to instead use the funds for operations). If accounting is not tracked appropriately, it can also be the case that these funds received are recorded as true revenue, skewing tax preparation if the CPA is careful and failing to accrue a liability on the balance sheet which will create an unseen “cash-cliff”. Failing to withhold and release Excise tax withholdings to the CDTFA will put a business in hot water akin to charging sales tax and retaining as revenue or withholding federal or state taxes from employees and utilizing for operations. The CDTFA offers payment plans to cannabis taxpayers that extend payment due dates. These can come with a heavy cost of a 60% penalty and interest. Penalties can be requested to be waived after payment in full, but it’s possible your business could be stuck footing the bill.
Dodge the Cash Cliff
- Set up accounting templates and systems to automatically book excise taxes withheld to liabilities.
- Partner with your Cannabis Business Banker to utilize a reserve account specifically for excise tax withholdings and place until filings are required (if possible)
- Utilize a rolling 13-week cashflow to time operational expenses and tax remittance.
- Set and stick to a cash-safety floor with your accountant
Getting the Team Onboard: 8300 filings
FINCEN the (Financial Crimes Enforcement Network) and the IRS require the filing of 8300 forms via the BSA E-filing platform within 15 days of receiving cash payments of $10,000 of greater. Often, Cannabis Banking Partners will also require proof of these filings prior to accepting cash deposits (and will check during regular due diligence). Failure to file and retain 8300 forms increases the risk of audit and the loss of banking service.
A common issue in maintaining a good 8300 process is that team-members, vendors and customers trusted to handle cash deliveries & pickups are often not familiar with the importance of this process unless coached. They can often be wary of signing an IRS document that would include their name, company name and/or social security information.
Set the tone and prepare the team
- The accounting team should maintain two sets of procedures on 8300s
- One set for Accounting, and
- One set for Cash-handlers
- Support accounting training Cash-handlers on this process
- File on time and retain digital records proving time of filing
Sources:
- https://www.irs.gov/pub/irs-pdf/f8300.pdf
- https://www.fincen.gov/news/news-releases/fincen-announces-electronic-filing-form-8300
- https://bsaefiling1.fincen.treas.gov/PublicAccess
- https://www.cdtfa.ca.gov/industry/cannabis.html
- https://www.cdtfa.ca.gov/formspubs/L856.pdf
- https://news.bloombergtax.com/daily-tax-report/cannabis-taxpayers-find-flaws-in-new-accounting-method-rules
- https://mboventures.com/280e-for-growers
- https://www.law.cornell.edu/uscode/text/26/280E
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
This post contains trusted sources. All references are hyperlinked at the end of the article to take readers directly to the source.
FAQs About Cannabis Accounting
What is a "cash-only" strategy in cannabis accounting, and is it compliant?
A “cash-only” strategy means operating entirely with cash due to banking restrictions. While common, it increases risks related to security, fraud, and compliance. Many states require businesses to track and report all cash transactions accurately. Non-compliance can result in audits and penalties.
How does federal illegality impact cannabis accounting?
Since cannabis remains federally illegal, businesses cannot access traditional banking services and face restrictions under Section 280E, limiting tax deductions. This increases tax burdens and requires strict financial tracking to ensure compliance.
Is there a specific accounting method cannabis businesses should use?
Yes, cannabis businesses typically use the accrual accounting method to accurately track inventory, revenue, and COGS. This method ensures compliance with IRS regulations and state reporting requirements.
What happens if I don’t comply with cannabis tax laws?
Failure to comply with cannabis tax laws can lead to IRS audits, financial penalties, revoked business licenses, and even criminal charges. Proper record-keeping and expert guidance are essential to avoid these risks.
Are there any financial certifications cannabis accountants should have?
Cannabis accountants should have certifications like CPA (Certified Public Accountant) or EA (Enrolled Agent), along with expertise in 280E tax law and cannabis financial regulations to ensure compliance and tax efficiency.
Can I hire a general accountant for my cannabis business?
While you can, it’s not recommended. Cannabis accounting requires specialized knowledge of industry-specific regulations, tax codes, and compliance risks. Hiring a cannabis-experienced CPA ensures accuracy and legal adherence.
What’s the difference between a CPA and an accountant for cannabis businesses?
A CPA (Certified Public Accountant) has advanced training, licensing, and regulatory knowledge, making them better suited for tax planning, audits, and compliance. A general accountant may handle bookkeeping but might lack industry-specific expertise.
How does an ESOP help with cannabis tax benefits?
An Employee Stock Ownership Plan (ESOP) can offer significant tax advantages for cannabis businesses. While cannabis companies are typically subject to Section 280E, which disallows most standard business deductions, an ESOP-owned business structured as an S Corporation can become federally tax-exempt once it reaches 100% employee ownership. This eliminates federal income tax liability, significantly reducing the financial burden caused by 280E. Additionally, selling owners can defer capital gains taxes through a Section 1042 rollover, preserving wealth while transitioning ownership to employees. There are ESOP advisory services specifically tailored for owners of cannabis businesses, should you need more information.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
