The recreational cannabis industry is considered a high-growth market, with the potential to grow to $66.3 billion by 2025.
However, despite the massive amount of cash pouring into the industry, operators are limited by the Cole Memorandum and federal regulations prohibiting banks from working with cannabis companies.
Lack of access to the banking system causes many problems for legal cannabis businesses – especially when it comes to paying taxes.
Federal regulations force cannabis operators to pay their taxes in cash (in most cases). There are a lot of cannabis taxes to be accounted for; the US government is estimated to have collected $4.7 billion in taxes from cannabis companies in 2017. That’s not to mention the state and local taxes cannabis operators are subject to – which can be at rates as high as 15% in some areas.
Cannabis operators want to pay their taxes, but the rules regarding how to submit payment make it a headache.
The transfer of cash is not only frustrating and difficult, but often risky. Handling that much cash presents a big personal safety risk for cannabis business owners and the agencies collecting the cash.
So the question remains, how can cannabis operators better navigate the tax return process given federal banking restrictions?
Let's explore the process...
EFTPS and Federal Taxes
Generally speaking, ordinary corporations and C-Corps pay the IRS through EFTPS.
EFTPS is a secure website that is linked to the IRS. It is a payment system through which business owners upload everything in a very secure way – and it’s a vast improvement on the previous system. Payments no longer get lost in the mail or counted incorrectly due to human error.
EFTPS is easy to set up a profile and link your bank account; plus, an added security measure allows business owners to set up a second authentication method through a PIN number sent through the mail.
Most traditional businesses use EFTPS for payroll tax deposits. Through EFTPS, the employer collects taxes and then sends them on the employee’s behalf, every pay period, which makes it easy for everyone involved.
Though, for cannabis operators, it is extremely difficult but not impossible to open a business bank account; therefore, EFTPS is not an option for cannabis companies. Cash can’t be transferred through EFTPS.
So as a cannabis operator, how can you pay federal taxes?
Federal Taxes for Cannabis Operators
Here’s how cannabis operators can pay their federal taxes in cash.
The first step is to find the location of your nearest IRS office. In California, there are IRS offices located across the state. Maybe 40% of the offices accept cash. We suggest that you call ahead to make an appointment and make sure that your nearest office accepts cash.
Give yourself plenty of lead time as there are few IRS offices and they have very few appointments available. And they will not give you a 'break' just because you couldn't get an appointment in time for the deadline, so plan way far ahead.
Once you secure an appointment, pack your cash and travel to the office.
We recommend you share the appointment day, time, and place with as few people as possible to mitigate the security risk. You will be traveling with a large amount of cash, so don’t increase your chances of being a target.
When you go to the office and make a payment, know ahead of time that the IRS office may limit the amount you can pay per appointment. If you’re paying $250,000 in taxes (which is not that uncommon), you will likely need to make many appointments. The reason for this is security; the IRS doesn’t want to take the risk of having a huge amount of cash on the premises.
One other thing, make sure you get a receipt each time you pay an installment on your taxes, just in case there’s ever a question down the road.
Alternately, some cannabis companies pay their taxes through the business owner’s personal account, and then have the cannabis company reimburse the business owner. This is a work-around that can save a lot of frustration, but also places a financial burden on one individual.
Workaround for Small Tax Payments
Some operators may just be getting started and not have a huge tax liability, so here's another method to pay your taxes in cash.
If there’s no IRS office near you that accepts cash, you can pay your taxes in cash at a participating retail store like 7-Eleven. The IRS has a program called PayNearMe that allows you to make a cash payment after being verified.
Note that payments are limited to up to $1,000 per day, and can take up to 5 to 7 business days to transmit. Verification also can take two to three business days.
Allow yourself plenty of time and review the limitations before committing to this option.
Paying State Cannabis Taxes in Cash
The steps for paying your state cannabis taxes in cash are similar to the process for paying your federal taxes.
The agency is different – in California, you will make payments to the franchise tax board – but you will need to find a location near you and set up an appointment. Most offices in California accept cash, but some will even take cashiers checks. Make sure to phone ahead and know what the limitations are before you go.
Overall, paying your taxes in cash as a cannabis operators is a burdensome and frustrating process.
We can help you strategize and make the most of the limited tax deductions available to cannabis operators. Get in touch with our team by clicking the get started button below.
One of the most difficult parts of operating a cannabis business in California is managing your cash flow. Luckily, this week, the state Senate is taking a step forward to ease that burden. SB930 creates a state charter for banks to serve cannabis businesses. This allows licensed and approved cannabis manufacturers, cultivators, and retailers to write checks to pay fees, taxes, and vendors, ultimately making it easier to do business.
California SB930 proposes putting the Department of Business Oversight in charge of banks and credit unions specifically established to process deposits, withdrawals, and transactions by the state’s budding cannabis industry. If approved, SB930 will allow cannabis companies to use this system of state-licensed banks to pay rent, vendor invoices, and also buy state and local bonds. It also means that the estimated $600 million in cannabis taxes the state intends to collect this year can be paid securely through banks, rather than in cash and in person.
This is great news for cannabis entrepreneurs, as it lowers risk in your accounting procedures and can increase security at your premises. Less cash on-site is a big win for anyone looking to operate safely while keeping security budgets low. A bank dedicated to cannabis businesses will also have implications for what you look for in a real estate property and how you pitch to investors.
The bill has to clear California’s State House of Representatives before going to the governor’s office, but this is overall very good news for the cannabis industry. If you have questions about this bill, or about accounting in general, please get in touch with our experts.
Last week, we covered how to find an investor for your cannabis business. It can be hard to find a cash infusion in this industry – many banks won’t issue loans due to federal regulations against the legal sale of cannabis. Instead, look for private equity firms, crowdfunding, or non-specific business or personal loans you can use to get your business off to a running start.
Hopefully, this will lead many cannabis companies to connect with angel investors, private equity firms, or venture capitalists. If you fall into that category, how can you be prepared for the future influx of opportunities from cannabis companies?
There are a few things to seek when evaluating cannabis companies from an investor standpoint. Cannabis companies come with a lot of inherent risk: the industry is new, regulations are still evolving, and there is a lot of cash involved. Bad record-keeping, poor cash control, and outright fraud are just a few of the things many investors worry about. Ask these questions to determine if a cannabis enterprise is worthy of investment.
Does the company use a cloud-based accounting system?
What’s wrong with a traditional accounting system, like keeping track of your sales and purchases in an Excel spreadsheet? A few things:
Cloud-based systems are more secure, mobile-friendly, and easily auditable. Keep tabs on your investment with a cloud tool that lets you quickly review invoices and receipts. Cloud software is more secure: if a laptop is stolen, the data stays safe. A cannabis business can limit the actions an employee can take by deploying different user roles, and make sure that only certain people can enter cash flow transactions. Ask for transparency from a cannabis business to ensure that your money is being used as it should be.
Does the producer or extractor use a robust system of measurements?
Cannabis producers or extractors work with lots of raw material. The end product is like liquid gold: so throughout the process, it’s important to have controls in place to minimize waste. Ask to see evidence that the ratio of final product to raw material makes sense. Can the cannabis extractor/producer demonstrate tight production controls? Can they show the use of standardized measurements at multiple points throughout the process? Can they show that they have taken steps to safeguard against fraud? These are all things you can look for when at an onsite visit to a cannabis operation.
Have they done their due diligence on third-party vendors?
Make sure anyone you’re entering into a partnership with has cleared their third-party vendors. Cannabis businesses have lots of secondary partners – from suppliers to distributors, it’s important to make sure these vendors are fully licensed and aboveboard. Ask a cannabis company for copies of their partners’ California cannabis permits, records of vendors’ physical addresses, contact names and numbers, and any mutual business references that can be checked. See that the cannabis company keeps vendor agreements with every partner on file.
Does the canna-business use a system of checks and balances?
Checks and balances can be as simple as separating staff roles for different accounting functions. Fraud is easy when one person handles all the bookkeeping functions: things such as processing customer payments, managing petty cash, keeping accounting records, or paying invoices. The cannabis business should have at least two people to manage these functions, and keep their accounting and cash handling separated. It’s also recommended that they also keep separate systems for inventory and manufacturing accounting.
Some companies might find it helpful to use a tool like Clover or Xero to keep an eye on their employees. Tools like Clover Payments Plus can give you as the investor better insight into things like cash in and cash out, sales, employee management and scheduling, and inventory tracking, and more.
Do they have up-to-date records?
Keeping up-to-date records show that that the cannabis business is the real deal. Here are just a few things to ask for:
Depending on the unique cannabis operation, get specific on what other permits, records, and local licenses you need to see. Do they have municipal permits? Do they use a system of dual signatures to control cash flow? Does the cannabis company have the right insurance?
If you have any questions, we’re here to help. Don’t hesitate to reach out to California Cannabis CPAs!
Potential investors are only looking to choose the best companies possible to invest in. As a result, they rely on calculated risk taking in order to determine which bets are likely to deliver returns. The preparation of financial projections by your company allows investors to analyze your startup’s management team, business model, assumptions, and understanding of the cannabis market.
Investors can gather a lot of information from your financial projections and they use them to determine whether your assumptions about the future performance of your business are sensible and if there are actually justifications for such projections within your business plan.
To help you get started, here is a general overview of how financial projections for cannabis related startups are prepared so that investors take your business seriously.
What Documents Go Into Financial Projections?
The three main documents that are used to prepare financial projections are:
In order to draw up these statements, you need to know the income and expenses for your business.
What Costs Should Cannabis Businesses Include in Financial Projections?
If you're seeking financing for your cannabis business, financial projections are essential for convincing lenders and investors that your business plan is viable and that your business will offer them a good return if they decide to invest in your business.
In addition, many business owners are often confused about how to draw up financial projections for the purposes of a business plan because of the fact that they are forward-looking statements and have virtually nothing to do with the historical performance of your business.
To help you understand how financial projections are developed for cannabis businesses, here are the costs that cannabis businesses should include in their financial projections and how assumptions are used in financial projections.
Include Both Variable and Fixed Costs
Here are the costs that you should include in your cannabis business financial projections.
In general, it is recommended that you draw up financial projections that extend three to five years into the future. In addition, some of the costs that you include in your financial projections will be fixed costs while others will be variable costs.
Variable costs are those costs that will fluctuate as your business matures, such as inventory. Fixed costs are those costs that are unlikely to change, such as debt at a fixed interest rate. It is the variable costs that you’ll need to take care with to ensure that your financial projections are indeed realistic.
How to Collect This Information
At its core, creating financial projections is more of an art than it is a science. That is because you are basically making educated guesses about the future performance of your business. In reality, you have no idea what the future has in store for your business. In addition, you just may find that things don't go as planned or the growth of your business actually ends up exceeding your expectations.
Therefore, your financial projections will be based on assumptions. Assumptions are not arbitrary. In fact, they are based on specific formulas. If your business has historical financial statements available, then you can use these in order to identify the formulas to use for your financial project assumption. However, for startups that do not have historical data, many accountants choose to refer to financial statements from approved sources.
EDGAR is a research tool that enables accountants to search the operations data of publicly traded companies. This is one way to obtain relevant financial information so that the financial assumptions used by these companies can be used in the preparations of financial projections for your own startup.
While some information can be gathered solely by using the details of other businesses, some costs will be unique to your business. Therefore, the costs included in your financial projections will likely be a combination of data from established companies and your company’s own data.
How Assumptions Are Used in Financial Projections
Once you’ve obtained the costs that you’d like to include in your financial projections, you’ll also need to make sure that your assumptions tie into the other details that you’ve provided in your business plan, if your goal is to obtain funding for your business. Regardless of your purpose for drawing up financial projections, your assumptions need to be reasonable if you want them to have real value for forecasting the future of your business.
If you're not clear on how to ensure that your financial projections are realistic, you should hire an accountant. An accountant that has experience in the cannabis industry can help you identify the characteristics of a successful, well-run cannabis business. An accountant with cannabis industry experience can also help you to effectively map the future performance of your business to established companies and can recognize the potential concerns that are unique to businesses in your industry.
Use Financial Projections As a Guide for Your Business
You may be interested in drawing up financial projections for your business solely because you want to attract investors. However, the most important reason for doing this is so that you can obtain a better understanding of how your business will do.
Use the details of these financial projections as a guide for running your business. Have financial projections drawn up periodically so that you can always have them available to get insights into the future health of your business.
Even if you aren't pursuing financing, you still need financial projections to plan for the future of your budget. Financial projections help you to budget and the serve as a way to measure the future success of your business, allowing you to identify areas for improvement.
One important thing to note here is that these documents are not the financial statements that you use to prepare your taxes. These documents are actually forward-looking statements while the income statement, cash flow statement, and balance sheet that you use to to do your taxes are historical-looking statements.
As a result, financial projections depend solely on the data that you choose to include in them. Given this fact, it is important that you prepare them carefully in order to avoid gross inaccuracies.
Have Financial Projections Prepared By a Third-party
If the purpose of creating financial projections for your company is to raise capital, you must have them prepared by a third-party. This ensures that your financial projections are free from fraud and the undue influence of company employees and management.
In addition, your financial projections must also be reliable in order for them to be considered of value to potential investors. This is because financial projections are based on assumptions. These assumptions aren’t just made up ideas about what you think will happen to your business in the future.
Assumptions are actually drawn up from financial data of established companies and the historical data of your own business, if available. An accountant will use set formulas to determine the values of specific assumptions in your financial projections.
In addition, financial projections also project your sales and establish expense budgets for your business. In this way, you'll automatically know that if your business is falling behind the financial projections, you need to make some changes to keep your startup afloat. On the other hand, if your business grows faster than expected, you must then put the contingency plans specified by your business plan into action so that your business can adjust accordingly.
What If Your Business Isn’t Started Yet?
If your business isn't actually up and running yet, it's even more challenging to figure out what your income and expenses will be years from now. To help you figure things out, use the market research that you used to develop your current business model. If there are other businesses in the cannabis industry that are similar to yours, look for publicly available information about these businesses.
Just because your business isn't started, that doesn't mean that financial projections are useless. In fact, when done by a professional, they can paint a realistic picture of what your business will look like a few years after it has been established, provided that no unforeseen disruptive events take place.
Projecting Future Profitability for Your Cannabis Startup
For cannabis startups, financial projections generally are designed to project three to five years into the future. This will allow you to see the point at which your business starts to turn a profit. For the cannabis industry, many businesses take years to break even, given the myriad of obstacles that cannabis businesses face.
With delays in achieving growth ranging from federal and state regulatory requirements to licensing, patents, and facility setup, financial projections can actually help you to overcome misplaced optimism about the immediate success of your business. With financial projections, you’ll have a more accurate picture of how the growth of your cannabis startup will look.
If you own or plan to own a cannabis business, it’s important to know that getting financial support from most banks will be difficult to do—but resources are available to help. We’ve put together a quick checklist for things to consider when trying to set up banking with your Marijuana business.
In 2014, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance for financial institutions on this matter. Their goal was to clarify the expectations of the Bank Secrecy Act—which requires financial institutions to detect and prevent money laundering—in light of recent state initiatives to legalize marijuana.
By looking at FinCEN’s guidelines for financial institutions, marijuana-related business owners can get a good idea of what they need to do in order to give themselves the best chance of receiving financial support from these institutions.
Below are some things to keep in mind:
Have you submitted an application and supporting documents for a state license?
It is imperative that you obtain the proper state license to operate if you wish to receive any financial support. Financial institutions want to be sure that you are legally allowed to operate your business, otherwise they could face consequences for funding your business.
Are you duly licensed through the local authorities?
Occasionally, local jurisdictions require further licensing or have restrictions on marijuana-related businesses altogether. Be sure that in addition to your state license, you also are legally allowed to operate locally and licensed if needed.
Have you properly vetted other parties you do business with?
If you are doing business with other cannabis-related parties, you will want to vet them to make sure they are properly licensed and documented as well. Any affiliation with an unlicensed or improperly maintained third party could reflect poorly on you.
Have you properly vetted your employees?
In a similar vein to vetting any businesses you associate with, you also will want to ensure that your employees have no previous criminal records, especially those relating to money laundering or illegal drug trafficking.
Do you have a policy in place for the products you will sell and customers you will serve?
It is important to thoroughly document the type of business you do, as there are big differences depending on whether you sell or produce medical marijuana as opposed to recreational marijuana. Keep track of everything your business does in some way.
Do you have a good understanding of your business’ reputation?
Stay on top of current rulings and regulations so as not to fall out of compliance with authorities on a state or local level.
Do you fully understand the Cole Memorandum and your state’s laws?
Having an understanding of what is legally expected of you is imperative, because if you violate a state law or the Cole Memorandum in any way, financial institutions have every right to immediately pull their support and report your business.
Can you demonstrate a legitimate source of significant outside investments?
This is something that all businesses should do, regardless of whether they are marijuana-related or not. Financial institutions are more open to providing financial support if they can see that other institutions or investors have faith in your business.
Because of the Bank Secrecy Act, failing to follow any of these guidelines might result in worse than just losing financial support. Depending on the severity of the situations, it may be the financial institution’s responsibility to report you and your business, resulting in being shut down and, possibly, legal ramifications.
In the end, it is your responsibility to be diligent and transparent about your business’ operations if you wish to obtain or continue receiving financial support from an institution. If you have any questions with regards to this, please don’t hesitate to contact us.
The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury that is responsible for receiving, maintaining, and analyzing the financial transactions data of businesses for law enforcement purposes, has issued guidance in order to clarify the Bank Secrecy Act (“BSA”) expectations for financial institutions which seek to provide banking services to marijuana-related businesses. The BSA requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering.
These updates have been made because there is has much confusion among the nation’s financial institutions on how to legally conduct business with marijuana-related businesses. As of 2016, certain marijuana-related activities have been legalized in 25 states and the District of Columbia.
The Cole Memo
At the same time, the U.S. Department of Justice Deputy Attorney General James M. Cole issued a memorandum (the "Cole Memo"), to provide guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act (“CSA”), which makes it illegal under federal law to manufacture, distribute, or dispense marijuana.
The memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels.
The U.S. Justice Department has offered assurances that it will not pursue criminal charges against marijuana-related businesses that are operating legally under state law. However, this non-enforcement stance has not guaranteed any protection for financial institutions.
Guidance for Financial Institutions
The FinCEN guidance clarifies how financial institutions can work with marijuana-related businesses while also making sure that their policies are inline with the marijuana enforcement activities of the U.S. Department of Justice under the CSA.
Financial institutions have been advised under the BSA to conduct due diligence for each customer to determine the risks of providing services to such business. The due diligence should include a thorough review of the business's registration and licensing with state authorities.
Financial institutions are also required to monitor these business on an ongoing basis and file suspicious activity reports ("SARs") where warranted. Three types of SARs may be filed, namely:
●“Marijuana Limited” SAR Filing. This report should be filed by the financial institution solely because the business is a marijuana-related entity and not because the business has violated state law or one of the Cole Memo priorities.
●“Marijuana Priority” SAR Filing. This report should be filed by the financial institution primarily in the case that the business violates state law or the priorities of the Cole Memo.
●“Marijuana Termination” SAR Filing. This report should be filed in the event that the financial institution wants to terminate the relationship with the business due to suspicion that illegal activity is taking place and to maintain the anti-money laundering compliance program of the financial institution.
Currency Transaction Reports ("CTRs") and Form 8300 are also required by FinCEN's regulations for financial institutions that offer services to any business that engages in marijuana-related activity.
Despite these updated guidelines, the fact that marijuana is still illegal under federal law but has been legalized in certain states has made almost all financial institutions outright reject doing business with marijuana-related businesses.
What Are the Banking Alternatives for Dispensary Owners?
At present, the majority of dispensaries are forced to pay their employees and vendors in cash while customers use an ATMs to obtain cash for purchases because of the conflicting laws for financial institutions. However, there is hope that the law may change in the near future.
The H.R.2029 - Consolidated Appropriations Act, 2016 bill, recently signed by President Obama, has a single sentence contained within the bill that says that the Department of Justice may not use money appropriated to it to prevent states from implementing laws regarding medical marijuana. However, banking reform was not specifically included within the bill.
In the meantime, alternative banking options are emerging for marijuana-related businesses that have been turned down by banks or do not meet the requirements of major financial institutions. Marijuana-related businesses can use online business directories and other industry resources to find payment solutions.
A number of payment processors have stepped up to provide transaction processing without the cash. Cashless ATMs for marijuana-related businesses are available from payment processors including Meta Payment Systems, Best Point of Banking, GreenStar Payment Solutions, Medical Cannabis Payment Solutions, and First American Merchant Funding.
Despite the fact that cryptocurrencies have been used in black market purchases of marijuana, they may also soon be used to help dispensary owners collect payments from customers. Cryptocurrencies, including Bitcoins, and PotCoins, are emerging as viable options for legal marijuana-related businesses.