Cannabis accounting and tax reporting are both unique and challenging. Poor record keeping can be costly, which is why companies need to make sure books and records are maintained properly for both internal and tax reporting. Cannabis records are different from those of a traditional business. Below, we have summarized various points and best practices that should help any cannabis entity maximize their ability to produce quality financial statements and tax returns.
Tax returns are due the first year a business is organized/incorporated. This is required regardless of sales or other activity. Make sure you properly file your tax returns the first year you are in business.
Maintain separate books and records for different entities. Certain aspects of different businesses are taxed differently. By maintaining separate books and records, each entity will be able to demonstrate different business activities that may be separate from the cannabis business; a position routinely scrutinized by the IRS.
Purchase or subscribe to a user-friendly record keeping product. Look for software that allows work from multiple locations or devices. It is also important that the software allows for transfer of data and enables access by employees and outside vendors.
Establish bank accounts for each entity. Personal and business accounts should not be comingled. Activity between commonly controlled entities is common but should be accounted for through due to/due from accounts to demonstrate these are intercompany transfers and not taxable events. The IRS will scrutinize these types of accounts, so having strong support is crucial.
Reconcile bank and credit cards monthly. Bank feeds allow transactions to be imported to the accounting record software. Timely reconciliation will help avoid duplication and other errors.
Create a detailed but customized chart of accounts. Because cannabis entities are only allowed to deduct cost of goods sold on federal income tax returns, categorizing each transaction properly is critical. Having a simple scheme such as 1,000 for assets, 2,000 for liabilities, 3,000 for equity, etc. will be easy to follow and ultimately save time when preparing tax returns.
Ensure all transactions are recorded accurately. Utilize memo fields and update work papers when coding transactions into cost of goods sold. This is a focus of accountants when preparing tax returns and will help avoid unnecessary IRS scrutiny.
Work with experienced cannabis accountants. In doing so, headaches, miscommunication, and excessive fees are minimized and filing delays avoided. Choose a firm that is familiar with the cannabis industry and is fluent with cannabis tax regulations.
Bookkeeping is all about being organized. Accurate records and transparent accounting procedures are what a cannabis business needs to track its finance and enhance its credibility with financial institutions and potential investors. Reach out to one of our Cannabis Advisory Services (CAS) professionals to help you set up a system to accurately track your financials.
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