Andrew Hunzicker: 3 myths about marijuana and financial services industry in Missouri

However, like many aspects within the cannabis industry there’s a great deal of misinformation and sometimes it’s hard to see through all the smoke. The following are the top three myths surrounding these services in the cannabis and CBD/hemp space.

• Myth No. 1: Accounting for cannabis companies is just like any other niche

We are experiencing the birth of an entire industry across the country and Missouri, including many “sub-niches” like farming, chemical processing, manufacturing of foods and products, distribution, testing labs, retail, and delivery companies. You might even find all of these “verticals” in a single company or organization.

There are major accounting and tax issues in these niches. For instance, many vendors will not service companies that operate within the cannabis industry. State mandated “Seed to Sale” tracking software is difficult to use and doesn’t integrate well with cannabis or accounting software, making it incredibly difficult to reconcile and ensure that state tracking is in line with internal counts. Bookkeeping and recordkeeping are not an option and must be done regularly for cannabis companies to be compliant.

The first place you’ll want to start when working with cannabis companies is to review and thoroughly understand the tax codes and how they relate to each vertical in the industry. Because cannabis is a Schedule 1 drug, U.S. Internal Revenue Code (IRC) 280E says a cannabis company cannot take any deductions or credits on their tax return. They are, however, allowed Cost of Goods Sold (COGS), as COGS is a return of capital and not a deduction or credit. That brings in Section 471, which also involves complex cost accounting that must be done at least quarterly to maximize the allowable COGS on the tax return using 471-11.

• Myth No. 2: This is an “all-cash” industry

Actually, credit unions and banks serve cannabis companies in many different states. For example, in my home state of Oregon, Maps Credit Union (with more than 10 branches) serves any licensed cannabis company.

That said, there is a lot of cash in the industry, so there is a big need for cash controls and procedures to prevent fraud and theft. Additionally, you will find many cannabis business owners have anywhere from two to 10 non-cannabis entities, such as a real estate or equipment company, and these can have easier access to banking.

The SAFE Banking Act is currently under federal review, and hopefully we will have easier access to banking and merchant services very soon for cannabis companies.

• Myth No. 3: Cannabis companies are a “gold mine” in terms of net income

Although sales taxes are quite moderate in Missouri compared to other states, at the national level via Section 280E it’s actually very hard for these companies to have a net income (if they are correctly doing accounting and tax).

Even though there is massive capital coming into the niche, and this is expected to grow rapidly as more funds, private equity, family offices and angel investors look to get into this space, just like the tech boom, many of these companies will lose money for years. We’ve seen some farms go through millions in cash and still go under, so companies that try to enter the niche without sizable investors will have difficulty.

The name of the game for founders and investors is focusing on building brands, growing revenues rapidly, vertically integrating, and staying well capitalized. Exit valuations are now based on growth and brand — not net income — and will likely be for some time.

Cannabis is one of the most rewarding industries for those of us who love the challenge of navigating complex issues, implementing systems and controls, and helping clients manage the financial health of their business, while maximizing cash flow.

Andrew Hunzicker, is an Oregon-based certified public accountant, founder of DOPE CFO, and a cannabis accounting and tax advisor with clients in Missouri.