How the CARES Act of 2020 and Tax Cuts and Jobs Act of 2018 Combined to create a Tax Refund Opportunity for Taxpayers subject to §280E

Ben Condon, CPA

The CARES Act of 2020 provided a five-year carry-back for losses earned in 2018, 2019, or 2020, which allows firms to modify tax returns up to five years prior to offset taxable income from those tax years.

That means a taxpayer could claim refunds from all the way back to 2013 if they generated a loss in 2018, 2014 if 2019 loss, and 2015 if 2020 loss. 

Tax Cuts and Jobs Act of 2018 added Sec. 471(c) to the Internal Revenue Code in order to simplify accounting for ending inventory for small taxpayers.  

This allows a taxpayer with annual gross receipts less than $25 million to use its own consistently applied books, records and accounting procedures to calculate COGS and to write-off ending inventory completely, potentially unlocking losses for  taxpayers. 

An aggressive, but defensible position a taxpayer could make, would be to make the accounting change to 471(c) and capitalize and run through COGS all or a portion of the cumulative costs that were previously not allowed to be taken due to the taxpayers' inventory method.  

For example, if they were a retailer and forced to use 1.471-3(b) inventory at costs for retailers (see Harborside case) previously, where they could only deduct the vendor price of their inventory as COGS and all other costs were denied, they could make the case to capitalize and run through their 2019 or 2020 COGS many years of now capitalize-able costs through COGS. The rent, security, bud-tender wages, etc. that the taxpayer can now include in their COGS could be retroactively quantified and included in beginning inventory which would then flush through COGS resulting in a large current year tax loss.

This would pull costs that were previously nondeductible into the present taxable loss, which would then be carried back to those years when those costs were disallowed under 280E.

The switch to 471(c) typically requires a Form 3115 - Application for Change in Account method, which must be filed by the extended tax deadline.  There's still time to make this change for tax year 2019 if extended, and plenty of time to plan for this if making the change for tax year 2020.

This is a game changer that could eliminate the historical damage 280E has done to many companies and provide historical tax relief via a windfall refund! 

If you would like to have us review your returns for possible tax savings, please reach out to us at 503-303-3730 or email info@b-cconsulting.com. 

Did the Tax Cuts and Jobs Act Remove the Teeth of 280E?

Ben Condon, CPA

Tax Cuts and Jobs Act of 2018 added Sec. 471(c) to the Internal Revenue Code, full text below, in order to simplify accounting for ending inventory for small taxpayers.  

According to this new Code section, "Generally, for taxpayers with annual gross receipts of less than $25 million, and who do not have an applicable financial statement, the tax payer may deduct ending inventor as a non-incidental material and supply OR use their books and records prepared with the taxpayer's accounting produces ("BRAP"). They may also use the cash method of accounting up until this threshold as well under 448(c)." 

Background

Remember that the CHAMPS, Olive, and Harborside, the tax court didn't challenge the fact that the taxpayers can take COGS, but rather how to calculate COGS and which code and treasury regulations apply. Recall that COGS is an adjustment to revenue under Treas Reg. Sec. 1.61-3, see full text below.

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§ 1.61-3 Gross income derived from business.

(a)In general. In a manufacturing, merchandising, or mining business, “gross income” means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. Gross income is determined without subtraction of depletion allowances based on a percentage of incometo the extent that it exceeds cost depletion which may be required to be included in the amount of inventoriable costs as provided in § 1.471-11 and without subtraction of selling expenses, losses or other items not ordinarily used in computing costs of goods sold or amounts which are of a type for which a deduction would be disallowed under section 162 (c), (f), or (g) in the case of a business expense. The cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer. Thus, for example, an amount cannot be taken into account in the computation of cost of goods sold any earlier than the taxable year in which economic performance occurs with respect to the amount (see § 1.446-1(c)(1)(ii)).

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Prior to the TCJA and 471(c), taxpayers of every size needed to account for their ending inventory, which reduces  the current year's COGS. The new 471(c) section now notes that this is not required if certain requirements are met.

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471(c)Exemption for certain small businesses

(1)In general In the case of any taxpayer (other than a tax shelter prohibited from using the cashreceipts and disbursements method of accounting under section 448(a)(3)) which meets the grossreceipts test of section 448(c) for any taxable year—

(A)

subsection (a) shall not apply with respect to such taxpayer for such taxable year, and

(B)the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either—

(i)

treats inventory as non-incidental materials and supplies, or

(ii)

conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

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Harborside

The in case of Harborside, the tax court ruled that inventory will be valued at cost, plus freight in, plus or minus trade discounts (under Treas. Reg. Secs. 1.471-3(a) and 1.471-3(b)). No absorption of any rent, budtenders, trimmers, in take personnel, etc. were allowed into inventory/COGS is allowed under 1.471-3(b) "Inventories at cost."  

The tax court also dispelled any notion that IRC. Sec. 263A applies to taxpayers subject to 280E due to the flush clause that states "Any cost which (but for this subsection) could not be taken into account in computing taxable income for any tax year shall not be treated as a cost described in this paragraph."

It should be noted at this time, that the TCJA provisions relating to 471(c) do not go into effect until the 2018 tax year, therefore this change in code would not have benefited Harborside, nor any other cannabis company prior to the 2018 tax year. 

Great, so how would this work?

A taxpayer using 471(c)(1)(B)(i) would claim their inventory costs as "non-incidental materials and supplies". Non-incidental materials and supplies are a deduction under Treas. Reg. Sec. 1.162-3, and therefore would be disallowed as a deduction if subject to 280E. Something we want to avoid at all costs.

So let's take a look at 471(c)(1)(B)(ii).

There now seems to be a lot of leeway given to the taxpayer. The only items explicitly non-includible in COGS are "selling expenses, losses or other items not ordinarily used in computing costs of goods sold or amounts which are of a type for which a deduction would be disallowed under section 162 (c), (f), or (g) in the case of a business expense."

It seems that a cannabis dispensary could make a very strong case to run a portion of rent, payroll, utilities, security, and other overhead items through cost of goods sold under their books, records and procedures as long as they qualify for 471(c), which the vast majority will qualify under.  

This provides the taxpayer a tool to manage their taxable income, as the taxpayer can make it part of their procedure NOT to carry an inventory balance at year end and run purchases through COGS as they occur. The taxpayer could reduce their taxable income by purchasing inventory in December to be sold the following year.

Taxpayers may make an automatic accounting method change by filing a Form 3115 by the extended due date of their 2018 tax returns. One could make the argument to retroactively apply the BRAP to costs incurred in 2017 and run through COGS via 2018 beginning inventory. See full rev proc here: https://www.irs.gov/pub/irs-drop/rp-18-40.pdf

Summary

To summarize, a taxpayer with annual gross receipts less than $25 million can use it's own consistently applied books, records and accounting procedures to calculate COGS. As long as COGS doesn't include selling expenses, losses or other items not ordinarily used in computing cost of goods sold.

The term "ordinarily" is up for debate, but if the taxpayer uses a consistent and prudent method of allocating the costs, it should be respected under  471(c). This could be a point of further clarification from the IRS, though we have spoken live to Counsel at the Service about this and they have noted that guidance does not appear to be forthcoming any time soon. Additionally, if there were to be Federal legalization in the future, taxpayers who have already switched to using 471(c) would have to file for another change in accounting method (if allowed). It is important to think over all related issues as it is ultimately the decision of management to take a tax position.

If you would like to have us review your returns for possible tax savings, please reach out to us at 503-303-3730 or email info@b-cconsulting.com. 

Analysis & Key Takeaways from the Harborside Health Center's Unfavorable U.S. Tax Court Case Decision

In a landmark case between the IRS and Harborside Health Center ("taxpayer"), the U.S. Tax Court held the following judgments--all against the taxpayer and in favor of the IRS: 

1) The Government’s dismissal with prejudice of a civil forfeiture action against taxpayer does not bar deficiency determinations.

The tax court held that a previously dismissed civil forfeiture case against the taxpayer did not preclude the taxpayer from income tax deficiencies. The taxpayer argued a Res judicada defense, essentially a double jeopardy defense for monies. Res judicata--or claim preclusion--is an affirmative defense that bars suits on the same cause of action, and it does apply to tax litigation. The court held that civil forfeiture and income tax deficiencies aren't one in the same, and therefore monies that were successfully defended from a civil forfeiture claim weren't protected from a tax deficiency judgement.  

2) I.R.C. section 280E prevents taxpayer from deducting ordinary and necessary business expenses. 

Despite various grammatical arguments from the taxpayer, the court held that the taxpayers business "consists of" trafficking a controlled subject, and therefore can only claim cost of goods sold, and no deductions or credits. 

26 U.S. Code § 280E - Expenditures in connection with the illegal sale of drugs      No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. 

3) During the years at issue taxpayer was engaged in only one trade or business, which was trafficking in a controlled substance. 

The taxpayer argued, similar to the CHAMPs case, that the revenue derived from non-cannabis items (clothing, paraphernalia, etc.)  constituted another trade or business not subject to Sec. 280E.  

In a previous court case commonly referred to as "CHAMPs," the court held that CHAMPs was involved in two separate trade or business, one being a cannabis dispensary, the other being a wellness center and were able to take deductions related to their wellness center. The divisions between these two business were much more clear (separate entrances, products & services, and lines of revenue).   

In this case, the Court argued that selling paraphernalia is akin to a bookstore selling stationary in addition to books, and that doesn't rise to the level of two trade or businesses, and further held the sale of paraphernalia is no different than the sale of the cannabis itself.   As a result, the taxpayer was disallowed all deductions, even the percentage allocated to the sale of non-controlled substances. 

4) Taxpayer must adjust for COGS according to the I.R.C. section 471 regulations for resellers.

This is the most painful opinion of the case and puts to rest any and all argument that IRC Sec. 263A can be applied to cannabis retailers, and the answer is "NO." It is written in a way that also makes the section's application to non-retailers highly doubtful as well, although they won't get hit quite as hard as retailers. 

The Court held that the taxpayer must follow the section 1.471-3(b), Income Tax Regs (relevant passages below). Essentially, the taxpayer can only deduct the actual purchase price of inventory from its vendors, and there shall be no absorption of any other costs (storage, intake, etc.) except for freight in.   Even activities such as making pre-rolls do not rise to the level of producer, and any cost associated would be completely disallowed under 280E. 

§ 1.471-3 Inventories at cost.

Cost means:

(a) In the case of merchandise on hand at the beginning of the taxable year, the inventory price of such goods.

(b) In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods. For taxpayers acquiring merchandise for resale that are subject to the provisions of section 263A, see §§ 1.263A-1 and 1.263A-3 for additional amounts that must be included in inventory costs. (Emphasis added, as Sec. 263A doesn’t apply to cannabis businesses.)

Key Takeaways:

• This court erased any notion about applying 263A to cannabis dispensaries, they cannot. 
• Cannabis dispensaries can only deduct their cost of goods sold at cost, and any and all below the line deductions are completely disallowed regardless of any paraphernalia sales. 
• S-Corporations are no longer a viable tax efficient entity for cannabis dispensaries as any W-2 reasonable shareholder compensation will be 0% deductible by the company and 100% taxable to the employee, shareholder, plus payroll taxes on top of that, OUCH! 
• This will spell the end for some struggling dispensaries, and consumers will no doubt feel price increases passed on to them. 
• This will (or in my opinion should) increase the political pressure on law makers to repeal 280E or at a minimum modify the final sentence to state "prohibited by Federal law AND the law of any State." 

Full U.S. Tax Court case can be found here.

Cannabis State Tax Series - Introduction

Executive Summary

Ben Condon, CPA, Founding Partner of BC Consulting, LLC kicks off his blog series which will define the jargon, provide a general conceptual overview, and implications of state and local taxes on cannabis businesses. 

Albert Einstein once said "The hardest thing to understand in the world is the income tax." Well, he was right!!! That was even before code section 280E, and most states didn't even have income taxes back then, yet.

Early in my career as a tax CPA, I was often confused how federal and state taxes intertwined, and any research left me more confused and created more questions than I started with.  I hope to share my understand with the readers of this blog. My philosophy is not to keep my knowledge secret, but to share it, even if that means competitors learn a few things. You should be weary of any CPA that has a "secret" calculation or does not wish to share with you their "proprietary" methodologies. A great CPA should help further their clients' understanding of the tax implications of any transaction by providing a clear logical, legal framework from which to operate. That is my goal.

In this blog series we'll cover the State Taxes 101, and and the more advanced topics of how they specifically relate to cannabis business, dare I say State Taxes 420?

The general topics to be covered:

The various types of taxes that apply to all types of businesses, including but not limited to: income, minimum, alternative minimum, real property, personal property, business and occupancy, franchise, excise, sales, capital, cultivation, transfer, withholding, and margin taxes.  In addition, Cannabis specific taxes will be covered, such as the Oregon marijuana sales tax or the California cultivation and excise taxes. 

We will walk through the conceptual road-map of income from the profit and loss statement to the Federal tax return to State tax return, and possibly a locality tax return. We will also discuss common Federal, state, and local differences along the way, such as:

• Federal 280E Disallowed Deductions allowed for States
• Depreciation Adjustments
• Loss Carryforward / Carryback differences
• Statute of Limitation differences

We will also cover multistate tax concepts, such as:

• Nexus & Economic Nexus
• Allocation and Apportionment
• Flow-through Entity withholding and Composite Returns
• Income Sourcing and throwback

In parallel with this blog series, I will also deep dive into specific states' taxing regimes and discuss the taxes levied on cannabis business in those states and provide tips on how to stay compliant.  "How Oregon/California/Washington/Nevada Taxes Cannabis" 

I'm happy to focus on any topics or specific states depending on your level of interest. 

Hit me up in the comment section and stay tuned! 

Can You Avoid the 10% IRS Cash Tax Payment Penalty?

Joseph Bailey, CPA

If you are reading this, you likely have been hit with the infamous 10% "cash penalty" from the IRS. The below information should be very helpful to you, but please note it is for illustration only as the IRS abates penalties on a case-by-case basis. I am not saying your specific penalty/interest will be abated. (Sorry, making sure I don't get cranky emails from people later!)

With the lack of access to banking, many cannabis companies are forced to operate solely in cash, and this includes making tax payments.

Hopefully, you already read my post on how to pay your taxes in cash. If not, take a look. In that post I mentioned that if you are declined by banks, that you should keep those letters. Well, here is why.

When assessed with the IRS 10% cash penalty applied to companies who do not use the required Electronic Federal Tax Payment System (EFTPS) you may be able to have the penalty abated by showing that you are "unbankable". This was the case for Allgreens v. US in which case the cannabis company was able to have the penalties dropped. The IRS then made some changes to their Internal Revenue Manual wherein they provided some guidelines on having the penalty removed.

Okay Joe, great background, now let's get to the meat and potatoes! How do I attempt avoid the 10% IRS cash payment penalty already?! Please note that there was no precedent set in the Allgreens case, these cases are handled on a case-by-case basis, and you may or may not be able to get your penalty removed. But what is the harm? If it doesn't work, you already owed the penalty. If it does work, it can save you thousands of dollars of unnecessary penalty payments.

1. Apply for bank accounts every year. The Feds will allow up to 2 years, but it is in your best interest in a few ways to try and obtain bank accounts regularly. One, you may just get a good bank account and avoid all of this. Two, an annual (or even better semi-annual) attempt at obtaining banking shows a consistent attempt on your part. The IRS doesn't remove this penalty for people who just decide to not try and get an account, so keep that in mind.

2. Have a qualified CPA draft you a letter response to the IRS.

3. SIGN the declaration letter.

4. Send in the signed letter along with any and all documentation showing your attempts to obtain legal banking.

5. Cross your fingers!

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

Importance of Efficient Tax Structuring for Cannabis Companies

By Ben Condon, CPA

Executive Summary

Ben Condon, CPA, Founding Partner of BC Consulting, LLC walks through a hypothetical legal entity structure for a vertically integrated cannabis company and highlights the need for upfront tax structure planning in order to avoid disallowed expenses and plan for future growth, investment and sale. 

One of the first questions every entrepreneur should ask themselves when starting a new business is: "Which type of legal entity should I setup?" In the cannabis industry, you should ask yourself "Which types of legal entities should my businesses organize to maximize tax savings?”  Entities? Yes, plural. 

Most of us are familiar with the common types of entities: Limited Liability Companies (LLC), C-Corporations, S-Corporations, Limited Partnerships, General Partnerships, etc. Due to IRC Sec. 280E, the only avenue for cannabis companies to recover their costs is through costs of goods sold (COGS), therefore it is necessary to employ multiple strategies including varied entity types. Costs such as sales, advertising, and delivery, commonly referred to as "SAD" costs, have no avenue to inventory/COGS.  As a result, careful tax planning is necessary in order to absorb costs into inventory throughout the entire value chain. 

In this post we will walk through an example of a vertically integrated life cannabis company founded by three individuals.  The company will produce, process, distribute, and sell high quality cannabis products in addition to branded apparel and paraphernalia.  The three founders are direct owners of Life Cannabis Company ("Life") which in turns owns three major subsidiaries: Licensed Cannabis Producer ("Producer"), Licensed Cannabis Wholesaler ("Wholesaler"), and Licensed Cannabis Retailer ("Retailer").  

Life's functions will be various, however at no point will it engage in the trade or business of trafficking cannabis. Those functions will be reserved for the underlying licensed cannabis companies. Life will advertise and hold the intellectual property, lease personal and real property, perform management, procurement, supply chain/logistic, and finance services for the underlying companies, and be the holding company and investment conduit. This will allow investment into a single entity and allow founders to easily sell ownership. 

Producer will cultivate cannabis and sell exclusively to wholesaler at an "arm's length" (fair market) price.  Producer's non-cannabis supplies will be purchased from Life with a procurement fee added, Producer and each other underlying company will lease it's property from Life (whether or not Life owns its property or leases it from a 3rd party and subleases to Producer). 

Wholesaler will purchased branded packaging from Life and then package cannabis purchased from Producer with this packaging.  This allows Life, a non-cannabis entity, to deduct its advertising as regular cost of doing business, and also categorizes the cost to Wholesaler as part of inventory/COGS. Wholesaler will then sell the branded and packaged inventory to Retailer and other 3rd party licensed cannabis retailers.

Retailer's store will be more than a cannabis store, it will be an experience of the lifestyle portrayed by Life's branding. Only a small portion of Retailer's square footage will be dedicated to cannabis products, while the majority of the store will house non-cannabis, Life branded items. This will minimize the non-deductible expenses that are deemed sales/trafficking related and allow for a bifurcation of expenses between non-cannabis and cannabis business lines. The non-cannabis business line will be able to deduct expenses similar to any other business, further reducing the impact of Sec. 280E. (See CHAMPS v. Commissioner) 

One important thing to highlight is that this structure allows for quick expansion as the intellectual property can be licensed and non-cannabis branded packaging can be sold across state lines to either 3rd party affiliates or to wholly owned licensed cannabis companies entities yet to be formed regardless of state.

The C-corp in this structure is necessary in order to create regarded tax partnerships at the cannabis business level in order to be able to have 3rd party transfer pricing. Without this, each entity would be a Single Member LLC under Life, and would be treated as divisions of Life; the operations of Producer, Wholesaler, and Retailer would consolidated and reported with Life's tax return. The inter-company transactions would be eliminated resulting in an increased Sec. 280E exposure.

In this scenario, we would advise that Life either become either a C-corp or S-corp in order to avoid Self-employment tax. This choice would not be cut and dry and would depend on various factors such as the state, tax situations of the individual owners, and fringe benefit desires of the owners among others. 

In summary, there are many factors that require careful consideration, and the sooner the issue is addressed, the more opportunities there are to avoid Sec. 280E disallowed expenses and plan for future growth. 

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

10 Questions to ask before hiring a CPA in the cannabis industry

Joseph Bailey, CPA

You have likely tried to google "280E CPA", "cannabis CPA", “cannabis tax” etc. and found that your options seem to be somehow limitless and horribly limited at the same time. 

Whether your State is legal for adult use (such as Oregon, Washington, Alaska, California, Colorado, etc.) or medically legal (29 States), the tax implications remain the same, and finding a good CPA can be daunting. Just getting to a good list of questions to ask a cannabis CPA can be impossible. 

We have been in the cannabis industry for years, helped hundreds and hundreds of businesses, and often are asked about what makes for a "good" cannabis focused CPA. 

The list below, while not exhaustive, should help point you in the right direction and at least weed out (pun certainly intended) folks who simply will not meet basic requirements. 

1. What certifications do you hold? 

A lot of the folks entering the industry are doing so out of lack of options versus passion for the industry. As such, does your CPA have an accounting degree, CPA (certified public accountant) certification, EA (enrolled agents), MBA (Master of Business Admin)? Different certifications can provide a certain level of assurance as to expected quality of tax return preparation, and highlights more importantly what someone is NOT certified to do. Make sure your CPA/EA/etc. has the background and certifications you need. 

Beyond this, it is good to check on where someone is licensed, then actually go to that State Accountancy Board website and look up that person's license. From there you will have a good view as to whether they have been disciplined by an Accountancy Board currently or in the past.

2. How many years’ experience do you have? 

This should be obvious, but in this industry, you really don't want your CPA to be learning their craft on your business. There is a GIANT amount of learning curve that CPA's undergo in the first 5 years of practice, let alone the first few years in cannabis. This is even more so when a CPA can achieve employment with a "Big 4" firm (we will discuss this in a later point).

3. What industries have you worked in?

Outside of understanding cannabis specific issues and practices, having a CPA with a varied background will be quite beneficial as they will have insights that someone who has been wedged in one industry for 20 years just won't have. Experience in retail, manufacturing, agriculture industries is an obvious benefit as well. 

4. Have you worked internally for any cannabis companies?

This is a bit of a BONUS style question. You will be able to find CPA's who do not have operational/inside experience working within a cannabis company, that will still be able to help you achieve great success. But if you have two CPA's that are 100% matched against each other, wherein one has managed internally, I would likely utilize the services of the CPA with internal experience as they will have seen things that someone on the outside looking in will not have had exposure from. 

5. Why did you join the industry?

At BCC, we are here to help an underrepresented class of businesses and owners, support a community and culture that we love, and we have a special set of skills and background that can and have greatly impacted business owners. 

Now, you would think a CPA in this industry would be prepared to answer this question, but you will be surprised by the answer you get from a lot of people. If your CPA isn't PASSIONATE about this industry, they will at some point place their cannabis clients at the bottom of the pile. Why? There are just easier ways to make money as a CPA than working with cannabis companies. At this current level of maturity of the industry, there is a lot of hand holding, revisions, and messy clean up that takes place within these companies.

6. Do you use IRC 263A to allocate mixed service costs?

This will not mean much to you now, but it is a VERY important part of limiting IRC 280E impact on cannabis companies. If your CPA is not using 263A, you are overpaying on taxes, plain and simple. 

7. How do you deliver sensitive information to clients?

CPA's tend to be behind the times, which means they are still handling a lot of business via paper, as well as sending a lot of personal information through email. You want to work with someone that can operate paperless (saves time and money) and utilizes secure servers and means of delivering info to you. There is already plenty of risk in this industry, you really don't want to have to worry about sensitive information being stolen electronically due to lax data security protocols. 

8. Have you or any of your staff ever been convicted of a non-traffic related crime? Was that crime directly related to your work?

Do you really need an explanation here? The public tends to think that if someone has a CPA license that it means they have never been in trouble... think again. There are plenty of FELONS that are CPA's, you should probably make sure that your CPA isn't one of them. "Street Cred" isn't something your CPA needs.

9. Do you have experience working in public accounting? Was any of that experience at the "Big 4" level?

A CPA that has only ever worked internally at a company will not have had the opportunity to work on the amount and varying type of issues that someone in public accounting will have seen. Now, that experience may be EXACTLY what you need, but usually that is only the case when someone is looking to hire a CFO, not a CPA. 

Discussing the Big 4 is usually where CPA's without Big 4 experience get upset. Please note, I am not saying that being a Big 4 accounting firm alumnus makes you better than someone without that experience. Remember "Big 4" is simply a reference to the biggest four CPA firms in the US. PwC, Ernst Young, Deloitte, and KPMG. 

When a CPA has a background in Big 4, especially for an extended number of years, that person has been through ten times the number of situations that someone from a small firm has seen. This isn't to say that they aren't as good of a CPA, I am simply pointing out that your chances of finding a high-level CPA are greater with a Big 4 accountant as they have been subjected to a large amount of high level, high stress work with very high expectations of completion and quality. Again, Big 4 experience doesn't mean the CPA will be great, but I personally find that the chances of hiring a good CPA go up when looking at Big 4 candidates versus non-Big 4 candidates (all other things equal of course)

10. Have you successfully defended any clients in the face of an IRS audit?

This will simply help put the cherry on top of the interview as it will get to the heart of the CPA candidate's experience level. "Pump and dump" firms exist all over the place, including the cannabis industry. They are attentive when accepting retainers, attentive to get your e-file form signed, then you never hear from them again. Preparing a return is one thing, defending it under IRS audit is another matter altogether. If you are looking for a CPA to partner with your company for success, having even minor tax audit experience will be beneficial.

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

How do I open a cannabis bank account?

Okay, so there is no central bank doing business with cannabis, but that doesn't mean it is 

the end of our search.

Your best course of action is to have you are looking into, though I will be honest and just let you know your best luck is at a credit union. When setting appointments or speaking with someone live, always be honest about what your company does, really does.

The banking question eventually (usually) turns into ... "Can I just open a bank account and not tell them I am in cannabis?" While you may be able to obtain a bank account through omission or outright lying, we advise you do not do this. Eventually, your clandestine account will be shutdown, and it usually happens at the absolute worst possible time. Note that the shutting down of your bank account may also include a temporary freezing of the funds in the account which can devastate already cash strapped businesses.

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Steps to get a cannabis bank account

Route 1

Ask around to others in the industry in your State. In Oregon, for instance MAPS Credit Union and Salal Credit Union both do direct, transparent banking business with the cannabis industry. This varies greatly state by state, so getting recommendations from others in your position is always the best starting point.

If you can find "friendly banks/credit unions", call first and set an appointment and ask them what documents need to be provided, which applications should be completed, etc.

When you show up and apply, you must show up looking and acting the part of a business owner, with all documents and applications completed fully and correctly. Sound like a stupid point to make? Of course you will do that right?! From my experience, wrong! People quite often go the lazy approach and put the onus on the bank to let them know how to do something.

Let me tell you, you are not the only person looking to get that cannabis account. You are not a beautiful snowflake to them, your business being social conscious doesn't matter, and quite frankly they likely have a large backlog of applicants to go through and approve/deny. If there are 10 other companies who did everything perfect and then there is you with half the documents completed, you are absolutely guaranteed to be pushed to the bottom of the list. With waiting times, that could extend your wait time by months.

Ensure you understand the fees being charged, and what information you will be required to provide to the bank on a regular basis, before signing any documents to setup the account(s). Note that there will likely be a waiting period while you and your business are vetted by the bank/credit union.

Once the account is received, don't start celebrating too early! A LOT of cannabis companies lose their bank accounts at cannabis friendly institutions. Why? Because they do not properly maintain their data, documents, etc. and are eventually given the boot.

Route 2 (most common)

If you are approaching banks on a branch-by-branch basis, gather your organizational documents, tax returns (if any), your books, your seed-to-sale reports (where applicable), and make an appointment to speak with the manager of the specific bank or credit union. When making the appointment, be crystal clear why you are making the appointment. There is no point in being coy, only to find out you have wasted your time, travel, etc. when they tell you right away they will not work with cannabis companies.

Show up to your appointment in a suit, have your documentation in order, and be ready to answer any and all questions posed.

If a question is asked and you do not know the answer, tell them "good question, I am not positive on the answer, I will make sure I gather this info and get it to you ASAP". The worst thing you can do is make things up, at some point they are going to know, don't waste anyone's time.

Please do not get discouraged if and when a bank says "no" to you, it will happen at least a few times. But once you do secure the relationship, you will know you have secured open, transparent banking, with an institution that is willing to work through issues with you.

If the bank is going to decline to offer you banking, ask them to provide the declination via letter. 

This is a real **Pro tip**, saving those letters can save you the 10% cash penalty the IRS charges corporations who pay in cash. I wrote more about that in another blog post. 

- Joseph Bailey, CPA

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