An employee handbook, like any standard operating procedure (SOP), is useful for a variety of reasons. It can help you onboard new employees and train them on your company culture; it can create a common bond for cannabis dispensaries with multiple locations; and, worst-case scenario, it covers you in legal matters in the event you need to fire someone.
What few cannabis operators know is that there are actually some tax advantages to having a well-thought-out employee handbook. Here are some ways that having a great employee handbook at your cannabis business can save you money.
Benefit 1: Reasonable methodology to claim employee hours for CoGS
The 280E tax code makes it impossible for cannabis operators to claim certain expenses other businesses would otherwise be able to deduct from their tax return.
Because cannabis remains a Schedule I classified substance, the only thing that cannabis operators are able to deduct from their taxes is CoGS – the cost of goods sold. CoGS refers to all costs involved in creating a product: for example, packaging, labeling, and raw materials.
The IRS doesn’t define the way to allocate CoGS. As a result, cannabis operators must come up with their own system. Very sophisticated companies adopt technology and filing systems. They implement job codes for each task, tracked hours and even have a check-in and check out function for each room that employees are in.
For a startup cannabis company, the employee handbook and job description serves as sufficient for developing a reasonable methodology for allocating employee time to CoGS.
In the employee handbook or job description, list out all of the different expectations for each employee’s role. One of those requirements will delineate how an employee will be spending their time. For instance:
If you ever experience an audit, which is likely in cannabis, then you will have these documents, which we call audit additives. Triangulate your employee handbook with your CoGS allocations with respect to payroll expenses to justify your tax deductions.
Benefit 2: Gross negligence protection
Cannabis businesses are cash-heavy. It’s imperative that you set and follow a large amount of SOPs around the movement of money and what you’re reporting to your accounting department and the government.
As we witnessed in the Alterman Case, a cannabis operator was given an accuracy-related penalty because they showed gross negligence in not keeping accurate records of cash movement within the company. In Alterman v. Commissioner, T.C. Memo 2018-83 a cannabis operator attempted to argue for a higher CoGS, but didn’t have a system in place to justify those claims. Instead, the court sided with the IRS’s narrow description of CoGS as “purchase costs plus production costs, and leaves out beginning inventory and ending inventory.”
These same gross negligence problems can arise with investors: most operating agreements detail expectations on how accounting and reporting must happen within the company. Failing to follow the agreed-upon guidelines could end up with you being kicked out of a company. Do you want to really be kicked out for something that you can easily prevent?
This is where your employee handbook plays a role. In the handbook, lay out the procedures that an employee will follow for various tasks that the IRS and investors will be looking at, including:
Of course, accidents happen, and something will come up because no organization is perfect. If you get audited, use the employee handbook and any relevant checks and balances you’ve installed. This shows that you have established policies and procedures and that employees knew what those policies and procedures were.
This is the best you can do. In addition, make sure you’re conducting regular internal audits so these critical cash handling and accounting procedures are actually being followed.
Benefit 3: Help with compliance and the employee/employer relationship
Hiring and firing employees are part of the job when you own a business. Having an employee handbook and job description can help make this part a bit more cut and dry. It sets a clear expectation and performance standard.
An employee handbook is more than just a reference manual for managers. “It explains expectations for everyone and mentions the consequences of violating these rules. By explaining workplace ethics and expected behavior with colleagues and the management, an employee handbook minimizes workplace disputes,” writes one HR expert.
There are plenty of federal and state regulations around hiring and firing practices and avoiding discrimination. An employee handbook is a useful tool to consolidate those regulations in one place and lay them out in clear terms to protect your business. Have set guidelines for the steps to take if an employee is underperforming: are they placed on leave? Do they get a probationary period? Do they get put on a performance plan, and if so, what does that look like?
Not only that, but it can save your HR team (if you have one) time from answering questions and onboarding new employees. Include information like:
Make sure your handbook is thorough and also easy to use. Once you have it in good shape, it can be used to guide your business for many years.
If you need help with creating a cannabis business employee handbook, then please reach out to our team today!