Bookkeeping Mistakes That Cost NJ Dispensaries Thousands
Cannabis operators in New Jersey are enjoying rapid growth at the moment. But when business is good, it’s easy to let day-to-day processes, like bookkeeping, get pushed to the back burner. And that would be a massive mistake.
The cannabis tax and regulatory landscape in New Jersey is complex, requiring meticulous attention to detail in all bookkeeping and accounting practices. Bookkeeping oversights could cost dispensaries thousands of dollars, but understanding the pitfalls can help you maximize deductions, boost profits, and avoid costly penalties.
Whether you’re a new licensee or have been in business since cannabis became legal in 2021, applying bookkeeping best practices can keep you on the right side of tax compliance and put money back in your coffers, where it belongs.
Dispensaries in NJ Have Unique Challenges: The Impact of 280E
All cannabis businesses exist under the dark cloud of IRC 280E. Under this federal tax rule, cannabis businesses can only deduct expenses directly attributable to the cost of goods sold (COGS). For dispensaries, which aren’t often integrated with cultivation or manufacturing operations, that doesn’t leave much in the way of write-offs.
IRC 280E was established to prevent illicit drug traffickers from profiting on the proceeds of drug sales. Since cannabis is still considered to be a Class I (illegal) substance, companies can’t deduct ordinary business expenses, like lease payments, office expenses, equipment, payroll, marketing, and even professional fees.
And while this is fairly cut-and-dried, New Jersey has decoupled from 280E at the state level, allowing companies to deduct these expenses from their state returns.
But the process is complicated. To leverage the full benefits of decoupling, dispensaries must maintain two separate ledgers. And while this may seem like a lot of extra work (it is), failure to do so means you’ll miss out on thousands of dollars’ worth of deductions annually.
Attributing COGS Expenses Accurately
Another bookkeeping mistake New Jersey dispensaries make is failing to attribute COGS expenses properly.
True, dispensaries aren’t always involved in cultivation or manufacturing, but some costs can be categorized as COGS, and you’ll need to calculate what portion of the expense applies.
For example, if you have a storage facility for inventory within the square footage of the store, expenses for that square footage can be classified as COGS. So, say your dispensary is 2,000 square feet, and your storage area is 300 square feet, you would be able to deduct 15% of the cost of maintaining that space. And while that might not seem like a lot, it adds up over time, and every little bit helps.
Similarly, if you have security systems monitoring that space, a portion of the cost can be assigned to COGS.
Say you have dedicated staff to manage inventory, prepare, and package raw goods when they arrive. The packaging costs can be deducted, as can the wages for the staff doing the work.
However, you must be precise about your rationale for all such calculations, as it will be questioned during an audit. In best practice, document every process and follow protocol to the letter, being prepared to back up your decisions if they are called into question.
These are some of the most common bookkeeping mistakes NJ dispensaries make. Most can be avoided by applying GAAP accounting principles, keeping your books clean and up-to-date, and ensuring your inventory records reconcile to the point-of-sale (POS) and Metrc.
Detailed Cash Tracking
Cannabis is a cash-intensive industry, especially in retail. Handling so much cash is risky, especially when you don’t have adequate internal controls. Having a large amount of cash on hand increases the potential for fraud or theft, and cash transactions can be manipulated more easily than those completed with a card.
To prevent fraud and ensure your cash goes where it’s supposed to, follow these best practices:
· Segregate duties related to cash. Authorizations, recording transactions, counting and custody of cash, and reconciliation to bookkeeping systems should never be performed by the same person.
· Implement a two-person rule. When counting cash at the end of the shift, two people should be present at all times.
· Use smart safes for deposits. These devices track who made the deposit and provide a verifiable audit trail for all cash movement.
· Maintain a clean paper trail for all transactions that preclude the need for an 8300 filing.
Establishing standard operating procedures (SOPs) for cash handling and recordkeeping will help you avoid many of the most common dispensary bookkeeping mistakes.
Inaccurate Cash Flow Planning
Having a lot of cash on hand might give you the impression that things are going great. But if you’re not keeping your books updated or analyzing your cash flow, it’s easy to fall behind, miss filing dates, or come up short when it’s time to renew your license.
Cash flow analysis is a critical aspect of dispensary bookkeeping. Tracking KPIs like net operating cash flow (NOCF), cash runway, free cash flow (FCF), and your cash conversion cycle (CCC) leads to more accurate forecasting and better business decision-making overall.
Ideally, you’ll want to create a compliance calendar, so you’ll know precisely when filings are due and how much you’ll need to cover them. Looking forward in this way ensures you’re always ahead of the game with a solid reserve as backup.
The Bottom Line
Dispensaries in NJ have a lot on their plates—a complex tax system, the rigors of IRC 280E, handling large amounts of cash, and ensuring every opportunity is leveraged for deductions on state and federal returns. Bookkeeping mistakes can draw intensified scrutiny from auditors and potentially land you in hot water with regulators.
In best practice, establishing solid SOPs and maintaining accurate, reconciled, and clean books will help you navigate the challenges.
Cannabis bookkeeping is never simple, but expert help is just a click away. Speak to the cannabis finance professionals at Growise today.