What U.S. CPA Firms Can Offer for the Legal Marijuana Industry
In 33 states of the United States, the use of marijuana for medicinal purposes is legally allowed. Additionally, in 10 of these states, the recreational use of marijuana is also permitted. The expansion of the legal marijuana sector across numerous states has led to a rising demand for assistance from certified public accountants (CPAs) and CPA firms by businesses operating within this industry. Providing that support comes with some serious administrative, ethical, and legal considerations.
- Legitimacy of the U.S. Marijuana Industry
Legislative measures at the federal level affecting this particular industry are in effect, such as the 2018 Farm Bill and the Safe Banking Act.
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2018 Farm Bill (remain in force through 2023)
The 2018 Farm Bill designated the U.S. Department of Agriculture (USDA) as the governing body responsible for regulating hemp. Additionally, the bill expanded the scope of federal crop insurance to include industrial hemp, thereby ensuring that the federal government will provide insurance coverage for cannabis crops. Hemp producers can now apply for USDA certification and grants, similar to other agricultural commodities.
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Safe Banking Act
The Safe Banking Act enables financial institutions to provide services to marijuana enterprises that are operating in states where the sale and consumption of marijuana is legally allowed, without facing potential legal consequences at the federal level.
Certain states have implemented state-level measures to address the issue of limited access to banking services. For instance, Oregon has authorized Maps Credit Union to offer banking services to the cannabis industry, while California is contemplating the adoption of a comparable approach.
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- Services a CPA Firm Can Provide
When CPAs and CPA Firms serve the legal marijuana industry, they must consider the following factors.
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Administrative Issues
The primary requirement for CPA firms aiming to specialize in the legal marijuana industry is the acquisition of competent firm members who possess a comprehensive understanding of this sector. These individuals will be responsible for conducting engagement quality reviews (EQRs) to ensure the accuracy and reliability of the firm’s services.
Second, it is important for CPAs to acknowledge that the tax preparer-client privilege outlined in Section 725 may not extend to clients involved in the marijuana industry.
At the same time, CPAs should take into account factors such as banking limitations, bankruptcy limitations, and insurance needs in the industry, so as to strengthen customer management and avoid risks brought about by serving the industry.
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Tax and Accounting Issues
(a) Section 280E
Section 280 E within the Internal Revenue Code (IRC) restricts the ability to claim tax deductions or tax credits for expenses related to engaging in a trade or business involving the distribution of controlled substances, which encompasses marijuana.
In the context of this industry, it is worth noting that the cost of goods sold is a permissible reduction of revenue rather than a deduction. CPA firms can then use this to provide their clients with a potential tax planning avenue to enable them to optimize their cost of sales and therefore maximize their financial benefits.
The exclusion of industrial hemp from the definition of marijuana under the Controlled Substances Act, as stated in the 2018 Farm Bill, is a significant point to consider. This exclusion implies that companies involved in the trade of industrial hemp are not bound by the limitations imposed by section 280E.
(b) Additional Tax Returns
In the legal marijuana industry, companies are required to fulfill additional tax obligations, such as filing excise taxes and complying with various jurisdictional tax regulations. The product may be subject to taxes or fees imposed by multiple taxing authorities.
Due to the complexity of these tax returns, CPA firms may implement insurance considerations and multiple levels of review for filings within this industry.
(c) Financial Statement Disclosures
In the context of financial statements prepared for clients operating in the legal marijuana industry, CPA firms have the ability to provide supplementary information pertaining to contingencies, adherence to laws and regulations, as well as considerations regarding the going concern assumption.
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