The Green Rush: What CPAs Should Know Before Considering Cannabis Clients

In recent years, the U.S. cannabis industry has been on fire, showing no signs of burning out as more states push to legalize marijuana for recreational use. Currently, 21 states and Washington, D.C., have legalized recreational use for adults ages 21 years and older, and 37 states have legal medical marijuana programs.

In Illinois, recreational possession and sales of cannabis products became legal as of Jan. 1, 2020. The state currently has about 113 dispensaries, and their legal cannabis sales totaled $1.5 billion in 2022, up from nearly $1.2 billion in 2021.

With the industry becoming more widely accepted throughout the United States, opportunities for CPAs in this niche are growing. Even if CPAs aren’t actively looking for cannabis clients, those businesses are actively looking for CPAs.

In the run-up to legalization in Illinois, Illinois CPA Society (ICPAS) member Nathan Summers, CPA, an audit principal at Miller, Cooper & Company Ltd., describes interest in the market as a “green rush.” As a firm that specializes in audit and tax, Summers says a handful of clients approached them asking for help. “We started consulting with them, walking them through the processes and challenges, and it just took off.” The result? A new, fast-growing cannabis practice within the firm.

Though despite the growing interest and size of the marketplace, the cannabis industry is highly regulated and extremely complex. Before CPAs and firms jump into serving this unique client base, there are several challenges and risks to consider.

IS THE CANNABIS NICHE RIGHT FOR YOU?

As ICPAS member Kenneth “Kenny” Mason, CPA, MBA, founder and CEO of Equibis, watched the cannabis industry start to take off in Illinois, he recalls having to “really think” about whether stepping into it was right for him. “This is an industry with a target on its back,” he cautions. “Developing a firm to support cannabis clients has required a lot of time, effort, and headaches, but it’s been worth it. These businesses need our support just like any other business.”

Ultimately, Mason committed to becoming an expert in the cannabis space and now helps cannabis retailers all over the U.S. exist legally and manage their finances, particularly their taxes. As cannabis remains a federally illegal substance, he observed cannabis businesses struggling with the tax code. “They pay federal taxes but can’t take advantage of tax credits and deductions like most businesses can, which creates opportunities for CPAs to step in and provide valuable, much-needed guidance.”

ICPAS member Molly Mayfield, CPA, member manager and founder of GreenFlex Financial PLLC, says initially, she was nervous about reactions to her decision to work in the cannabis space, and she understands why others may be reticent to work in it.

“At first, I wouldn’t even comment on or like cannabis-related posts on LinkedIn,” Mayfield recalls. But, she also knows that working within the ethical boundaries of the accounting profession, there’s no reason she can’t offer her services to cannabis clients, particularly when Illinois requires cannabis operations to consult CPAs for specific services. “As long as I serve everyone’s businesses well, cannabis and non-cannabis clients, I’m doing my job.”

As a former public accounting firm auditor, ICPAS member Fay Rofalikos, CPA, senior director at Green Thumb Industries, a national cannabis consumer packaged goods company and retailer, says her job change brought a lot of surprises. “When you’re an auditor, you think of everything in terms of debits and credits,” she says. “When you’re an operator, especially in cannabis, it’s not that simple.”

Summers says it’s also important to consider the impact adding a cannabis practice might have on a firm’s existing client base—what they might think and how they might react to the firm’s decision.

Ultimately, from a reputation standpoint, Mason says firms should ask themselves: Do we want to stick our necks out and work with cannabis companies?

NAVIGATING THE CHALLENGES

Ironically, for an industry that’s highly regulated, there’s not always a lot of direction. “We’re constantly asking what rules we should be following,” Mason says. In the early days, he used his best judgment, watching how court cases were handled and monitoring how the IRS made decisions.

Even prior to the pandemic, Mason was working virtually with clients all over the U.S., some of whom didn’t have bank accounts. These days, banking has become slightly more lenient as state governors have worked to help financial institutions support cannabis operations. “But implementing internal controls and getting accurate numbers for these cash-heavy businesses is still a challenge,” he admits.

Before getting involved in the cannabis niche, the biggest lift for Summers’ firm was getting everyone educated. “There’s not a lot of history, so you can’t always find other examples to study,” he says. “It took a lot of digging to understand how cannabis compares to more mature industries.”

Summers admits that the firm’s education efforts are continuous. “You don’t learn everything in a month. We constantly work on staying up to date about what’s new, especially from a regulatory perspective.”

Mayfield says working in this illegal/legal dichotomy means there’s a complexity to the accounting and back-office processes involved. “Many times, we’ve taken the long way around to get to the answer,” she explains. “Because we operate with the stigma of illegality, we don’t have the privilege of operating with optimal systems and technology.” She says companies in every sector, from technology to transportation, may not do business with cannabis companies. As a result, cannabis companies don’t have as wide a range of vendors to choose from. “It takes us longer to get to those necessary efficiencies.”

Rofalikos agrees. “We’re not out there dealing with Chase or Bank of America, for example. Our options are more limited because of who can work with us for banking and payroll,” she says. “That doesn’t mean the accounting is bad or we don’t have accurate statements, but we’re not always working with the top-tier technology. As a CPA, you need to be extra aware and understand the challenges. What’s simple for your other clients isn’t as simple for your cannabis clients.”

TAKING THE LEAP

CPAs setting up shop in the cannabis space can learn a few things from the professionals who’ve gone through the process already. They offer these seven tips:

1. Get coverage: Consult with attorneys and insurance providers and add language to engagement letters as a protective measure. Mayfield says before she went through the process of confirming her insurance coverage, she found there was a special type that was better for her to have as an entrepreneur versus a more general policy.

2. Create connections: Actively connect with other CPAs and mentors within in the tight-knit industry. “Because we’re so limited on banks, merchants, and other service providers, it really helps to network with other professionals in the industry for their intel,” Rofalikos says. “Without that network, you don’t know who can help you and your clients succeed.”

3. Understand industry compliance: When a financial institution accepts your cannabis client, be prepared for rigorous compliance, and stay vigilant. “CPAs in this field must have spectacular, timely reporting or else a client’s bank can shut them down,” Mayfield warns. “Knowing how to navigate IRS rules at both the state and federal level is critical for those of us working in this space. We need to guide our clients to make the most out of these regulations.”

4. Know your clients: “When practitioners don’t understand the nuances of what this industry deals with, it leads to frustration and stumbling blocks,” Rofalikos says. “You’re asking the same questions, but you need to take a step back. While generally accepted accounting principles are the same as other manufacturers and retailers, we operate differently on the processing side.”

5. Be flexible: The state-based nature of the cannabis industry remains one of the biggest challenges. “There’s a different regulatory framework in every state,” Rofalikos says. “You’ll need separate legal entities and banking. If you’re in 14 states but use the same vendor for each business, you’ll still have to cut 14 checks to that vendor—one from each state. It takes more people, time, and resources. While a typical manufacturing company with centralized accounts can take advantage of efficiencies, our accounts must remain decentralized. Streamlining will continue to be a challenge until cannabis is federally legal.”

6. Be persistent: When times are tough, Mason reminds himself of his “why,” which isn’t only building a community and being on the forefront of a burgeoning opportunity, but also helping struggling businesses. “We’re all trying to figure out this unknown. It’s about persistence. Keep your eyes on the prize and find other people who are going through similar situations.”

7. Go all in: Don’t dabble in this industry, Summers advises: “Specialization, expertise, and experience all come over time. If you’re going to be in it, do it right.” Summers’ firm began by sending team members to conferences and doing a lot of research. “We wanted everyone to be properly educated before we started offering advice,” he explains.

While the cannabis industry is moving quickly and making progress, cannabis still remains illegal at the federal level. Therefore, businesses and the CPAs that serve them will continue to face unique challenges and scrutiny.

Mason describes his cannabis clients as being between a rock and a hard place, and he’s determined to help. “There’s an urgent need for our expertise,” he says. “This industry is only going to continue to grow. It’s exciting as we figure out a way to help these businesses come out on top.”

Rather than shy away from the industry, Rofalikos encourages CPAs to embrace it. “Consider this ‘Prohibition 2.0.’ Look at where we are now, and don’t be afraid to get involved. You can be a part of shaping something new—you can’t ask for a better opportunity.”

Above all, Mayfield says it’s worth it to enter the cannabis space and make a difference in the quality of life for others, not just the cannabis business owners, but the customers they serve. “If we do our job right, and do it consistently, we give our clients—and theirs—peace of mind by making sure they’re working with a CPA who’s experienced, educated, and connected within the cannabis industry. They know they can rely on CPAs to be their strategic business advisors and help them reach their next level of success.

Natalie Rooney is a freelance writer based in Eagle, Colo. A former vice president of communications for the Ohio Society of CPAs, she has been writing for state CPA societies for more than 20 years.

Related Content:

• In the Weeds: CPAs and Legal Cannabis: Cannabis businesses need finance talent, but is jumping into this complex and rapidly growing industry right for you?
• Illinois’ Cannabis Industry: What Accountants Need to Know: As more states move to legalize marijuana, accounting professionals must stay ahead of the curve to help serve this unique, complex niche.