Editor's note:Andrew Hunzicker is a Certified Public Accountant (CPA) and CEO of DOPE CFO, a company that provides accounting and bookkeeping training programs for financial professionals in the cannabis industry. The views expressed in this article are solely those of the author.

For professionals, financial executives, and accountants new to the cannabis industry who have never handled large amounts of cash, they often find themselves in a bind—because the accounting controls they relied on in the past likely won't work in this industry.

The fact is, if you want to keep your cannabis company or clients compliant, you must implement robust internal controls, including paying bills on time, maintaining complete records for every payment, daily cash counts, and segregation of duties.

Accounting professionals and financial statement preparers often misinterpret tax laws, attempting to add deductions that dispensaries may not be allowed. This means that CEOs and CFOs who heavily rely on their accounting teams may unknowingly expose their companies to hefty fines, or even be ordered to cease operations for failing to follow proper procedures.

How can you ensure your clients stay compliant?

One area where many people are confused is Section 280E of the Internal Revenue Code (IRC), which prevents cannabis businesses like dispensaries from claiming tax deductions. Since cannabis is still listed as a Schedule I controlled substance, any business that distributes or holds cannabis products, regardless of intent, is effectively engaged in illegal trafficking. Finding loopholes around 280E to claim deductions is impossible; the IRS is well aware of these tricks and is taking a hard stance.

Because cannabis companies cannot enjoy deductions or tax credits like traditional businesses, they have limited options for reducing tax liability; in fact, the only method is through IRC Section 471 to determine which costs can be allocated to inventory through cost accounting and ultimately included in cost of goods sold (COGS). This process is extremely complex, especially for dispensaries.

So, how exactly do dispensaries obtain deductions?

The answer lies in COGS and IRC Section 471. However, tax laws apply differently across various verticals in the cannabis industry, making it more difficult for dispensaries than for farms or manufacturing businesses in the sector.

A universal rule applicable to all cannabis companies is: the use of inventory and its valuation method must unquestionably reflect the company's income and be consistent with how the company accounts for inventory in its financial statements.

Specifically for dispensaries, regulations essentially allow, provided accountants operate correctly, for the reduction of a dispensary's taxable income through COGS. Given the IRS's strict oversight, cannabis accounting professionals must continuously track their clients' inventory accounting for the company to have a chance of passing an IRS audit.

Poor bookkeeping is no joke; companies may face legal fines exceeding $70,000, or even higher. If you need a cautionary accounting case, look no further than Alterman v. Commissioner of Internal Revenue. According to a June 15, 2018 report by Lowndes law firm, the 2018 Tax Court ruling upheld a 20% penalty imposed on the taxpayer for underpayment of taxes related to deductions taken.

That said, as long as proper procedures are followed and there is an understanding of how to comply with IRC 280E and 471, success remains entirely possible.

Tools Needed for Dispensary Accounting

Another unfortunate aspect of dispensary accounting is that there aren't many ready-made tools in the cannabis industry that make the job easier for accounting professionals. State-mandated "seed-to-sale" tracking, coupled with POS systems that are poorly integrated and difficult to reconcile, adds many extra headaches to handling cannabis operations.

Cash control is another issue, as banking services are nearly nonexistent in many states. Local licensing agencies require owners to be responsible for ensuring adequate security measures, so companies cannot use theft as an excuse to explain cash shortages.

Worse still, accounting software is often not cannabis-friendly, so you need a chart of accounts and workpapers specifically tailored to dispensaries in order to correctly execute Generally Accepted Accounting Principles (GAAP) accounting when planning any allowable deductions.

In short, the best way for companies in the cannabis industry to succeed is to implement annual, quarterly, monthly, weekly, and daily dispensary accounting procedures, and strictly adhere to GAAP and IRC 280E, thereby correctly achieving tax minimization.