10 Areas of Importance for Cannabis Entrepreneurs by Brian Kuo
The Emerald Trade Alliance had the pleasure of hosting Brian Kuo on our Tax, Accounting and Tax panel at our Member Meeting in October. Brian brought a lot of fresh insight to the table as an observer of the industry from his position at McDonald Jacobs, a business consultant and accounting firm in Portland. We’re happy to share the overview of his presentation here!
Originally a presentation for the Emerald Trade Alliance on October 18, 2017 by Brian Kuo
1. Over the table vs. under the table transactions: in the pre-regulated cannabis industry, when
transaction were below-the-table, the main factor in deals was trust. In the regulated markets,
above-the-table transactions are about transparency and documentation. These paradigms are
difficult to change, depending on where the entrepreneur started. With the experienced
growers, they are not used to habitually documenting every move. In fact, making things
confusing and hard to trace was the norm. Make sure the company can trace all the
information on the books to source documents.
2. Basic accounting classes: I had never smoked cannabis before, UNTIL I got my first cannabis
client. I believe I should understand my client’s businesses inside and out, whether it be a
restaurant, tech company, or cannabis company, I must try the product or service. I toked up
for the sake of my clients. Whoever is doing the books, accounting, or tax work should follow
the same ethos, and take a basic accounting course. If the person doing the accounting within
the cannabis company does not understand what I am telling them, we will not be able to help
3. Is this transaction okay in a normal business? If a company can’t do the transaction in a non-cannabis company, your likely cannot do it in a cannabis company either. Shifting expenses and revenues around illogically does not work in any business.
4. “Special 280E adjustment”- in general, 280E is basic cost accounting. The books used
operationally should match the books used for taxes. If the company is suddenly adjusting costs
into costs of goods sold just for the company’s taxes, and they don’t match the normal books,
this is not a good idea. It basically gives the IRS a direct path to what the company might have
been aggressive on for 280E purposes. The main difference with 280E and how it affects
cannabis, is that they can only deduct cost of goods sold on their taxes. Otherwise, the books
should appear the same when reconciling taxes to books.
5. Operating agreements: make sure the operating agreement is explicit in what happens with the
company, for all facets of operation, from inception to liquidation. I have seen many
partners/members/shareholders disagree and part ways, and the operating agreement dictates
how you handle these situations.
6. Complicated entity structures: we have witnessed companies make structures that are much too
complex, with many entities. When asked why, many responded “to confuse the IRS.” This is
not a wise decision. The IRS will go down the rabbit hole as far as it goes to try to figure things
7. Tax as the driver for conversation: many cannabis entrepreneurs only care about the tax
repercussion, and not the basic accounting. This is mistake. All transactions should have
procedures to ensure proper documentation and accuracy, which roll into the financials, which
then roll into tax planning. Most cannabis entrepreneurs go backwards, first wondering why
taxes are so high, then looking at the financials, finally looking at the specific transactions. This
8. No forecasting: as the old adage goes, if you fail to plan, you plan to fail. Many cannabis
entrepreneurs fail to plan, and this puts them in tight spots when they suddenly need cash. Plan
ahead, with a rolling 12 month forecast. Know where the company is going.
9. Mixing business and personal: this can lead to disaster. If the company cannot separate
transactions between personal and business, the IRS won’t either if you get audited. Even if the
company is a separate entity, it will be likely that personal assets will not be protected if things
10. Missing cash controls: most cannabis entrepreneurs we meet are not counting their cash
periodically and not keeping a log of cash draws and injections. Many times they end up with
negative cash on their books, due to this. What happened? Negative cash is a physical
impossibility. Keep a cash log and make sure the company knows where all the cash is going.
Reconcile the cash balance, the same way the bank is reconciled. Each transaction should be