Jessica discussed what cannabis business owners can do to protect themselves from the IRS
Jessica Velazquez is a founding partner of K&H Consulting, a licensed Las Vegas-based financial services firm committed to providing sound and practical accounting, tax, and advisory services to the cannabis industry. She is the firm’s main authority in tax matters for corporations, partnerships, individuals and representing clients before the IRS. Jessica holds a Master of Science in Taxation from DePaul University, a Bachelor of Science in Accounting from Southern Illinois University and is a licensed Certified Public Accountant in IL, as well as NV. We sat down with Jessica to talk about what it’s like being on the accounting side of the industry, as well as what cannabis business owners can do to protect themselves.
Marijuana Retail Report: What made you want to co-found KH Consulting with your partner?
Jessica Velazquez: I have a friend that suffers from an autoimmune disease called Sjogren’s, which is part of the Lupus family. She’s had this for about 25 years, and over that course of that time, used a variety of pharmaceuticals to alleviate her symptoms and pain that comes with it. In that time as well, she continuously got worse to the point where she had stage four kidney disease. It was then that she began her journey to find alternatives for her health, and came across medical cannabis and the healing effect of CBD. Along the way, we met several cannabis business owners and operators and got a deeper understanding of the plant and its healing powers as well as the business needs of the industry. We quickly learned that there was a huge gap for financial professionals in the cannabis space. No one would service them, either because they were in the cannabis industry or they just didn’t understand the compliance and tax issues that applied to them. As financial professionals, we saw this need in the industry that we could fill – to become advisors to the cannabis community as we have with our other clients in other industries.
Marijuana Retail Report: Can you give me a little bit of an overview of 280 and some of the tax issues that are confounding a lot of cannabusinesses today?
Jessica Velazquez: In a nutshell, Code Section 280E prevents operators in the cannabis industry from deducting their operating costs except for their cost of goods sold. Costs such as marketing expense, rent expense, payroll, and other expenses that are critical to running an everyday business, are not deductible in the cannabis industry because of 280E. The initial intent of this archaic law was to prevent drug traffickers from being able to obtain the all the tax benefits of operating like other legal businesses. In today’s landscape, given that cannabis is now legal in 29 states on a medicinal level and 8 recreational ones, 280E just doesn’t make sense anymore. This is a legitimate industry, as evidenced by all these states legalizing it and that close to 70% of Americans believe that they should have access to medicinal marijuana. Again, 280E is a huge business hurdle that the industry faces.
Marijuana Retail Report: What would you say are some of the biggest issues that you see in the industry?
Marijuana Retail Report: With respect to the operators, its understanding the tax law complexity of what is and isn’t deductible. They come with a mindset of running a legal cannabis business in their respective state, but are confused as to why are they penalized from being able to claim all their business expenses in the same way other businesses do. That’s where we come in to advise clients of the complexities and guide them in understanding the what is and isn’t an allowable business deduction so they are fully informed when making business decisions.
Marijuana Retail Report: How is Nevada unique from other markets when it comes to accounting in the cannabis industry?
Jessica Velazquez: From an accounting perspective, accounting principles are the same here as they are in California, Colorado, Washington, or any other state where there is a cannabis market as they are guided by Generally Accepted Accounting Principles (GAAP) at the federal level. However, from a regulatory perspective Nevada is one of the most regulated markets in the industry, starting from the application process to the product testing standards. We’ve become the gold standard for regulating cannabis. Other states are looking to Nevada to model their regulatory framework and putting in operational standards into the requirements needed to operate a cannabis business in their state.
Marijuana Retail Report: We’ve seen Hawaii move towards a cashless system for their medical industry with CanPay as well as the rise in the interest of cryptocurrencies on the consumer market. How are these non-traditional payment methodologies going to affect the way that accounting is done in the future in the industry?
Jessica Velazquez: That’s a great question. Hawaii state regulators addressed the banking issue in the industry head-on and thus implemented CanPay as their form of capturing all the cash activity within the state. Although very cutting edge, Hawaii is a small volume market when you compare it to other states such as California & Colorado. We’ll have to wait and see how that rolls out in Hawaii and whether it can work for the larger markets. Because of this lack of access to banking, other alternatives such as cryptocurrencies (Bitcoin) are becoming seriously viable options to cash management in the industry. In conversations with other financial professionals in the industry, one of our concerns is that cryptocurrencies, by being self-regulated, may be off-putting to regulators due to lack of controls. So, if this industry is really trying to become a regulated industry in the face of our federal leaders, operators may want to reconsider dabbling in the cryptocurrency territory.
Marijuana Retail Report: Do you see possibly the federal government maybe mandating cryptocurrency regulation, or do you see them maybe coming up with a federal system similar to CanPay that would go under all legal and medical states?
Jessica Velazquez: The thing is that the federal government has the option to fix the banking issue that the industry currently faces. HR Bill 2215, The Safe Act of 2017, would create protections for depository institutions that provide financial services to cannabis-related legitimate businesses, and for other purposes. If we can’t get actual legislation that supports banking for the industry, then I do suspect they may look at other options for the industry such as CanPay. However, we need to continue to push the envelope to find a permanent, safe and secure method of dealing with all this cash.
Marijuana Retail Report: How should an emerging cannabis business make sure that they’re on top of compliance with their books?
Jessica Velazquez: I would say at the very minimum, they should ensure they have accounting procedures in place to document cash movements and inventory controls. Also, key is keeping all the related documentation, i.e. receipts, for all the business expenses paid in cash. For a company that has multiple locations or jurisdictions, you will want to have the same process in place for financial reporting purposes across your various operations. For example, if you are a business owner operating a cultivation in Mendocino County and a dispensary in Oakland, both locations should follow the monthly accounting close calendar with the same supporting documentation, so the consolidated financials of both activities are apples to apples. By streamlining these procedures on the onset of operations, business owners will reap the benefits a hundred times over as their business grows. Best practices are to have these procedures and processes documented but more importantly, they should be followed and adhered to.
Marijuana Retail Report: What would be the best methodology, in your opinion, for a entrepeneur in the marijuana industry to pick an accountant or a CPA?
Jessica Velazquez: Make sure they’re licensed and that you’ve done your due diligence to ensure that their credentials are up-to-date. You also want to make sure they have some experience in the cannabis industry – that they understand the nuances and what the regulators/auditors are looking for. Most businesses, and particularly new operators trying to get into this space, are very cost-conscious so they look at it more as non-value added expense when they really should be looking at it as an investment. The right CPA is going to have their best interest at heart, and they’re going to set them up properly from day one going forward.
Marijuana Retail Report: If you could give one piece of advice to all of our readers, what would it be?
Jessica Velazquez: I would say document, document, document. It sounds so simple and probably has been beat to death by every tax professional, but I see it time and time again. Lack of support of documentation upon an audit will most likely result in an expense being disallowed. Operators in the cannabis industry need to keep in mind that there is a huge spotlight on them, both from state regulators during their operational audits, and from federal IRS agents during a tax audit. The first thing they’re going to ask for is the underlying documentation. Those audits become much more challenging when all of that is not in place, and usually what we find is the tax liabilities are much higher than they need to be just because the books and records weren’t all together. To piggyback on that, working with qualified professionals or CPAs who can give them guidance on how to become compliant will be key. Your regular bookkeeper is probably not going to understand all the nuances of the industry, so working with the right professionals that understand what the regulators are looking for and have experience in this field, are going to be their best bet.
Nick Gaulin: What’s next for you and KH consulting?
Jessica Velazquez: We have a great client base here in our home state of Nevada but we also service clients in California and Colorado. We officially opened an office in LA a few weeks ago which we’re really excited about! We’re focused on becoming the cannabis CPA firm industry leader in 2018 and beyond and looking to grow into other markets such as Ohio, Maryland, and Maine. But our current focus will be here on the West Coast, particularly California as it goes to a fully regulated market, effective January 1, 2108.