How Multi-License Cannabis Operators Can Simplify Tax and Entity Management
Cannabis is one of the most regulated and complex industries in the United States. No matter what entity structure you choose, tax compliance coupled with federal and state regulatory hurdles will keep you on your toes!
If you own multiple licenses or operate in multiple jurisdictions, the work of managing financials and taxes compounds accordingly. While establishing an integrated vertical can be hugely beneficial and lucrative, it also comes with its fair share of challenges. Operators need to have qualified industry-specific advice to ensure filings, taxes, and operations comply with federal, state, and local rules.
In the absence of a clear strategy, operators may wind up with a significantly higher tax burden, missed deadlines, and inefficient financial planning. However, by applying a Goldilocks mix of the right business structure, cannabis-specific expertise, and purpose-built software, it is possible to simplify, streamline, and maybe even have enough time, energy, and capital to think about your next acquisition.
At Growise, we understand how easy it is to fall behind or make decisions without a clear roadmap to get you where you want to be. Today, we’ll share some ideas on how to
We’ve put together a few concepts, tips, and best practices to ease the road ahead.
Structuring for Multi-License Success
Most licensees establish separate licenses for each entity. Sometimes this is an afterthought, such as if the expansion happened over time or without a great deal of forethought.
However, this approach can make any kind of oversight, reporting, and tax planning way more complicated than it ought to be.
Assuming you are in the planning stages and starting from scratch, the ideal situation is to structure your enterprise as a holding company that owns and manages all licenses under a single umbrella. That way, you can consolidate administrative functions, HR, finance, and compliance at a high level and segregate operations to the individual licenses.
To make this strategy work, you must create and maintain comprehensive intercompany agreements to ensure all transactions are documented in a consistent manner across entities. Doing things this way will streamline audits, improve compliance, and create operational efficiencies as there will be no duplication of effort across the various entities.
Technology is Your Friend
There is absolutely zero chance that you could manage a multi-license entity without the right technology. Your company (as a whole) is a multi-faceted enterprise that requires enterprise-grade solutions.
Enterprise Resource Planning software (ERP) is an excellent tool that enables you to view the entire operation through a single pane of glass. It will integrate with other software and pull in data, providing robust reporting capabilities.
Be sure to choose compliant software that integrates seamlessly with the ERP and enforce software consistency across all entities. Doing so will make your IT environment easier to manage, more secure, and, ultimately, scalable.
Standardize Charts of Accounts Across All Entities
Standardization, wherever you can implement it, will simplify your life, taxes, and finances. If each entity records transactions differently, reports will become a massive pain in the rear. Further to that, enforce consistent coding for COGS, expenses, and compliance-related transactions. Keep it as simple and consistent as possible, and you’ll eliminate a lot of backtracking and error remediation.
Train all accounting staff thoroughly to ensure they are doing things the same way. From one entity to the next, a standard chart of accounts will make for smoother audits, more meaningful reporting, and easier benchmarking.
Stay on Top of 280E at Every Level
IRC 280E prevents cannabis companies from deducting everyday business expenses. However, some states have decoupled from the rule, providing some tax relief and complicating tax reporting at the same time.
Multiple entities can introduce advantages to 280E. For example, if using a holding company structure, expenses normally prohibited to cannabis licensees would be deductible.
Another hot tip for multi-license operators is to ensure they’re tracking COGS expenses accurately using GAAP cost accounting practices. Meticulous documentation is required to justify your decisions, but doing so can significantly mitigate tax liability.
For CFOs, controllers, and senior accounting staff, create a matrix that maps each jurisdiction under your purview; that way, all finance personnel have a single source of truth to refer to.
Prioritize protectionism in every transaction, and you have the potential to reduce the overall tax burden significantly.
Automate Compliance for Each Entity
All cannabis entities are required to comply with federal, state, and local laws. From one jurisdiction to another, these rules can vary drastically, even within the same general geographic area. Overlooking any of these rules, missing a filing deadline, or failing to renew a license on time can result in fines, suspension, and even license revocation.
In best practice, create a centralized compliance calendar to track all critical dates and activities. Set up reminders to alert the relevant stakeholders so nothing falls through the cracks. Take a systematic and detailed approach to reduce risk.
Sharing Resources Across Entities
Vertically integrated cannabis operations often share resources, such as consultants, payroll services, real estate, equipment, and the list goes on. To withstand auditor scrutiny, these relationships must be mapped out and documented to ensure transactions are compliant for all entities.
Create intercompany agreements to define how these interactions will proceed, including terms and pricing. Prioritize transparency and consistency to ensure every transaction is defensible.
Common Pitfalls Multi-License Entities Should Avoid
What’s the saying? The road to ruin is paved with good intentions…
Not to be alarmist, but there are many potential traps to fall into if you don’t take the time to think things through. Some of the most common pitfalls we see with complex cannabis entities include:
Setting up too many entities without any clear purpose.
Ignoring local taxes and fees.
Not documenting inter-licensee transactions properly.
Waiting until year-end to address 280E challenges.
Using off-the-shelf software that is not cannabis-specific.
Any one of the above oversights can increase your chances of an audit, non-compliance, fines, and penalties – not to mention the endless headaches you’ll endure until you get it all straightened out.
So, while running a multi-license cannabis operation can be rewarding and highly lucrative, you need to set it up properly and establish policies and processes that will support that success.
Speak to the experts at Growise today, and discover how we can help.