Rescheduling Cannabis: How It Will Shake Up Accounting & Tax

Uncategorized Jun 15, 2024

The Cannabis industry is on the cusp of a monumental shift that's about to rock the accounting and tax world. As a CPA with nearly a decade of experience in this niche, I've watched this industry explode from the ground up. We've gone from zero to a $33 billion legal market in 2023, with support for legalization at an all-time high. But hold onto your calculators, folks – what's coming next is going to make the past few years look like a warm-up lap.

In April 2024, the DEA dropped a bombshell: they're considering rescheduling Cannabis from Schedule I to Schedule III. This isn't just another regulatory tweak; it's a seismic shift that could unleash a tidal wave of growth, investment, and opportunity. But it also means a whole new ballgame for accounting and tax in the Cannabis world.

In this guide, we will provide an overview of how Cannabis rescheduling will impact accounting and tax, including:

The impact Cannabis rescheduling will have on valuations
How accounting and tax will change when Cannabis is rescheduled
What Cannabis accountants can do to prepare for Cannabis rescheduling
How Cannabis accountants can provide added value in the changing landscape

If you're an accountant, investor, or Cannabis business owner, you need to be ready for what's coming. In this guide, I'm going to break down exactly how this rescheduling could shake up the industry, what it means for your bottom line, and how you can position yourself to ride this green wave to success. Let's dive in.

How Likely Is Cannabis Rescheduling?

One of the first questions we always get is, “how likely is Cannabis rescheduling or legalization?” People worry there is still a social stigma attached to marijuana and that it will impact not only the potential for rescheduling and legalization but also their potential for success in the Cannabis industry.

According to an article published by Bloomberg, attitudes on Cannabis have shifted significantly in the last 50-60 years. Nearly 70% of all American adults now support full legalization. That is up from around 10% in 1969.

(Source: Gallup)

There is also bipartisan support for Cannabis legalization. Both red states and blue states support Cannabis legalization. For example, Cannabis is fully legal in Oklahoma, a traditionally red state, and Oregon, a historically blue state.

(Source: mjbizdaily.com)

You can poll any group you want - Republicans, Democrats, Independents - and you’ll find that a majority of adults support legalization. We have many examples of this across the United States. 24 out of 50 states now have full Cannabis legalization; we’ve seen that go from 0 to 24 in 10 years, and we expect that number to rise as we get closer to the 2024 election.

All of that is to say, the industry and attitudes are changing. It will most likely begin with the DEA approving the rescheduling of Cannabis.

Let’s look at what that means.

Understanding the Controlled Substances Act

The Controlled Substances Act established a federal drug policy that regulates the manufacture, importation, possession, use, and distribution of certain substances. The legislation created five schedules, or classifications, along with qualifications for a substance to be included in each.

We’ll focus on Schedule 1, where Cannabis is currently scheduled, and Schedule III, the new proposed schedule for Cannabis.

Schedule I is the highest and harshest schedule for a substance under the act. For a substance to be classified as Schedule I, it is said to have no medical use and high potential for both abuse and addiction. Other examples of substances classified as Schedule I include ecstasy, methamphetamine, heroin, and LSD.

Something to note is that even drugs like fentanyl and oxycodone, which are responsible for tens of thousands of deaths annually, currently fall under Schedule II.

Schedule III, the new proposed classification for Cannabis, is much milder. The substances in this classification have medical uses and while they still possess the potential for abuse and addiction, the risk is much lower. Other examples of substances in this classification include Tylenol, codeine, testosterone, and ketamine. Some of these are available over the counter while others are regularly prescribed by doctors.

The DEA has recommended that Cannabis be moved from Schedule I to Schedule III. The reclassification would lead to a cascade of state and federal-level changes, and will completely change the market.

The Rescheduling Process

In October 2022, the Biden Administration launched an investigation into Cannabis being on Schedule I. The Health and Human Services (HHS) department recommended Cannabis be moved to Schedule III, and the FDA agreed. Now rescheduling is awaiting approval from the DEA. We’re cautiously optimistic as the DEA typically follows the recommendations from the HHS department. For now, things are looking green for the prospect of rescheduling at the very least.

The Biden Administration is doing everything it can to gather votes and many industry experts, including us here at DOPE CFO, believe rescheduling will happen sooner rather than later.

Let’s look at the benefits of rescheduling as well as some of the potential challenges that could arise.

Benefits and Challenges of Rescheduling

There are benefits and challenges that will come from rescheduling, We’ll start with the benefits.

Banking: from cash-only to full financial integration

The current banking situation for Cannabis businesses is, to put it mildly, challenging. Due to federal prohibition, most traditional banks have shied away from serving Cannabis clients, fearing potential legal repercussions. This has created a host of issues that have hampered the industry's growth and operational efficiency.

Currently, many Cannabis businesses operate primarily in cash, which presents significant security risks and operational headaches. Imagine trying to manage payroll, pay taxes, or handle large transactions entirely in cash. It's not just inconvenient; it's dangerous and inefficient.

Some Cannabis businesses have managed to secure limited banking services through state-chartered banks or credit unions willing to take on the risk and compliance burden. However, these services often come with hefty fees and restrictions, making them less than ideal for growing businesses.

The lack of banking access has broader implications beyond day-to-day operations. Without bank accounts, Cannabis businesses struggle to build credit histories, making it nearly impossible to secure loans or lines of credit for expansion. This has forced many to rely on private investors or alternative funding sources, often at much higher interest rates than traditional business loans.

Rescheduling Cannabis to Schedule III would fundamentally alter this landscape. While it wouldn't automatically solve all banking issues overnight, it would significantly reduce the perceived risk for financial institutions. Here's what we might expect:

Increased Participation from Banks: More banks, including larger national institutions, would likely begin offering services to Cannabis businesses. This increased competition could lead to better service offerings and reduced fees.
Normalization of Financial Services: Cannabis businesses could expect access to the full suite of financial services other industries take for granted. This includes business checking and savings accounts, merchant services for credit card processing, and payroll services.
Electronic Payment Solutions: With banking restrictions eased, we could see a proliferation of electronic payment solutions tailored for the Cannabis industry. This would reduce cash handling, improve security, and enhance the customer experience.
Access to Capital Markets: Improved banking relationships could pave the way for Cannabis businesses to access capital markets more easily. This could include everything from business loans and lines of credit to the ability to issue corporate bonds.
Reduced Compliance Burden: While compliance will always be a crucial aspect of Cannabis banking, rescheduling could simplify the reporting requirements for banks. This could make Cannabis accounts less costly to maintain, potentially reducing fees for businesses.
Interstate Banking: As the industry moves towards interstate commerce, having banking partners that can operate across state lines will become crucial. Rescheduling could make it easier for national banks to serve multi-state operators.

However, it's important to note that challenges will remain. Banks will still need to comply with anti-money laundering laws and know-your-customer regulations. Cannabis businesses will need to maintain meticulous records and demonstrate full regulatory compliance to maintain their banking relationships.

As accountants and financial professionals, our role in this new banking landscape will be critical. We'll need to help our clients navigate the transition from cash-based operations to full banking integration, ensuring they have the systems and controls in place to meet banks' requirements. Additionally, we'll play a key role in helping Cannabis businesses leverage their new banking relationships to fuel growth and improve operational efficiency.

The shift in banking access represents a monumental change for the Cannabis industry. It's not just about having a place to deposit cash; it's about gaining access to the full spectrum of financial tools that can help these businesses scale, innovate, and compete in an increasingly sophisticated market.

Bankruptcy Protection: A Crucial Safety Net

Currently, Cannabis businesses operate in a precarious financial environment due to their inability to access bankruptcy protection. This is a direct result of Cannabis being classified as a Schedule I substance at the federal level. Let me illustrate why this is so significant.

I've seen this impact firsthand. One of the first Cannabis farms I worked with went under, and the consequences were dire. Without the option of bankruptcy protection, there was no structured way to manage the business's decline. The result? A sudden closure that left many people jobless overnight. It's a scenario that plays out all too often in our industry, and it's one of the hidden risks that many don't consider when entering the Cannabis market.

Rescheduling Cannabis to Schedule III could change this landscape dramatically. Here's what it might mean:

Access to Chapter 11: Cannabis businesses could gain the ability to file for Chapter 11 bankruptcy protection. This isn't about escaping debts; it's about providing a structured process for reorganization. It gives struggling businesses a chance to restructure their debts, renegotiate contracts, and potentially emerge as viable entities.
Job Preservation: With the option to reorganize rather than abruptly close, many jobs could be saved. In an industry that's becoming a significant employer in many states, this is crucial for local economies.
Orderly Asset Distribution: In cases where a business can't be saved, bankruptcy protection ensures a fair and orderly distribution of assets among creditors. This is far preferable to the current situation where the process can be chaotic and inequitable.
Increased Investor Confidence: The availability of bankruptcy protection could actually encourage more investment in the industry. Investors may be more willing to take risks if they know there's a structured process in place should things go wrong.
Better Long-term Planning: Cannabis businesses will be able to engage in more robust long-term planning, knowing they have this financial safety net if needed.

It's important to note that while bankruptcy protection can be a lifeline, it's not a get-out-of-jail-free card. Businesses will still need to operate responsibly and maintain strong financial controls. As accountants and financial advisors, our role will be to help Cannabis businesses stay financially healthy and to guide them through the bankruptcy process if it becomes necessary.

The introduction of bankruptcy protection to the Cannabis industry represents more than just a financial tool – it's a step towards normalizing Cannabis businesses in the eyes of the law and the financial sector. It's another piece of the puzzle in creating a stable, sustainable Cannabis industry that can weather economic ups and downs like any other sector.

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Interstate Commerce: Breaking Down State Barriers

One of the most significant changes that rescheduling could bring to the Cannabis industry is the possibility of interstate commerce. This shift has the potential to completely reshape the market landscape. Let me break down what this could mean for the industry.

Current state of affairs

Right now, we essentially have 44 different state markets with varying pricing structures for similar products. It's a fragmented system that leads to inefficiencies and missed opportunities.

For example, if you create an exceptional THC-infused kombucha in Oregon, you're limited to selling it within state lines. You can't ship it to Illinois, Oklahoma, or any other state, regardless of demand. This restriction limits growth potential and forces businesses to duplicate efforts across multiple states.

Opening new markets

Imagine a scenario where you could produce Cannabis products in one state and sell them across the entire country. This would allow businesses to:

Expand their customer base exponentially
Take advantage of economies of scale in production
Specialize in products that may have national appeal but limited local demand
Reduce costs by centralizing production in areas with optimal growing conditions or lower operating costs

For instance, a California edibles manufacturer could suddenly access markets in Florida, New York, and everywhere in between. This opens up enormous growth potential for businesses that are currently constrained by state boundaries.

Challenges of state protectionism

However, it's not going to be a simple free-for-all. We need to be prepared for some pushback and complications:

State-Level Protections: States that have invested heavily in building up their local Cannabis industries may implement measures to protect these businesses from out-of-state competition. This could manifest as additional taxes on imported Cannabis products or licensing requirements for out-of-state businesses.
Regulatory Disparities: Different states have varying regulations on things like pesticide use, testing requirements, and product formulations. Navigating these differences for interstate sales will be complex.
Tax Implications: The current tax structures are based on intrastate commerce. Interstate sales will require new frameworks for how taxes are collected and distributed.
Transportation Challenges: Transporting Cannabis across state lines will require new security measures and tracking systems to prevent diversion to the black market.

Comparison to Other Industries

We might see a system develop similar to what we have with alcohol distribution. After Prohibition, many states implemented a three-tier system for alcohol sales, and we could see something similar emerge for Cannabis. This could involve separate licenses for producers, distributors, and retailers, with specific rules governing how products move between these tiers across state lines.

Implications for businesses and accountants

For Cannabis businesses, this shift will require:

Reevaluating business models and growth strategies
Investing in logistics and distribution networks
Navigating a more complex regulatory environment

As accountants and financial advisors, we'll need to help our clients:

Understand the tax implications of selling across state lines
Develop systems for tracking multi-state sales and compliance
Evaluate opportunities for expansion or partnerships in new markets
Manage the increased complexity in financial reporting and auditing

The move to interstate commerce represents both a massive opportunity and a significant challenge for the Cannabis industry. It has the potential to create national brands, drive down costs for consumers, and fuel rapid industry growth. However, it will also increase complexity and competition. Businesses that are prepared for this shift – with robust financial systems, clear strategies, and expert advice – will be best positioned to thrive in this new landscape.

Research and Development: Unleashing Innovation

Rescheduling Cannabis to Schedule III has the potential to dramatically accelerate research and development in the industry. This shift could unlock a new era of innovation, bringing together the worlds of Cannabis, pharmaceuticals, and biotechnology.

Big pharma's entry into Cannabis

One of the most significant changes we're likely to see is the entry of major pharmaceutical companies into the Cannabis space. These companies have been watching from the sidelines, hesitant to engage with a Schedule I substance. With rescheduling, we can expect them to dive in headfirst, bringing with them:

Substantial R&D Budgets: Pharmaceutical giants have deep pockets for research, potentially dwarfing current Cannabis R&D spending.
Advanced Research Facilities: Access to state-of-the-art labs and research tools could accelerate discoveries.
Experienced Research Teams: Scientists with expertise in drug development could bring new perspectives to Cannabis research.

Explosion of New Medicines and Products

This influx of resources and expertise could lead to a boom in new Cannabis-based medicines and products:

Targeted Therapies: We might see medications developed for specific conditions, moving beyond the current broad-spectrum approach of many Cannabis products.
New Delivery Systems: Research could yield innovative ways to administer cannabinoids, improving efficacy and patient experience.
Isolating New Compounds: Beyond THC and CBD, there are hundreds of cannabinoids and terpenes to explore. R&D could unlock the potential of these lesser-known compounds.
Combination Therapies: We might see Cannabis compounds combined with traditional pharmaceuticals for enhanced effects.

Standardization and Quality Control Increased R&D is likely to lead to more standardized products:

Consistent Dosing: Pharmaceutical-grade products could offer more precise and reliable dosing.
Quality Assurance: Stricter manufacturing standards could improve product safety and consistency.
Clinical Trials: More robust clinical trials could provide stronger evidence for Cannabis's medical benefits.

Impact on the Industry

This R&D boom will have far-reaching effects:

Intellectual Property: We're likely to see a surge in Cannabis-related patents and proprietary formulations.
Job Creation: Increased R&D will create new jobs for scientists, researchers, and support staff.
Investment Opportunities: Companies with strong R&D pipelines could become attractive investment targets.

Challenges and Considerations

However, this shift also brings challenges:

Regulatory Navigation: Researchers will need to navigate FDA approval processes, which can be lengthy and costly.
Balancing Act: The industry will need to balance pharmaceutical development with the needs of existing medical Cannabis patients.
Small Players vs. Big Pharma: Smaller Cannabis companies might struggle to compete with the resources of large pharmaceutical corporations.

Implications for Cannabis Professionals

For those of us working in Cannabis finance and accounting, this R&D boom means:

New Valuation Metrics: We'll need to consider R&D pipelines and intellectual property in company valuations.
Complex Accounting: Tracking R&D expenses and capitalizing on successful developments will become crucial.
Funding Strategies: We'll need to help clients navigate funding options for costly R&D projects.
Tax Implications: Understanding R&D tax credits and how they apply to Cannabis businesses will be essential.

The potential for R&D in a post-rescheduling Cannabis industry is enormous. It promises to transform not just the products available, but the entire landscape of the industry. As financial professionals, we need to be prepared to guide our clients through this new terrain, helping them capitalize on opportunities while navigating the complexities that come with increased research and development.

Regulatory Landscape: Navigating New Waters

Rescheduling Cannabis to Schedule III will significantly alter the regulatory landscape, but it won't simplify it entirely. In fact, we're likely to see a more complex, multi-layered regulatory environment emerge.

Here's what we can expect:

Continued state-level regulation

Despite federal rescheduling, states will retain a significant role in Cannabis regulation:

Licensing: States will likely continue to control who can grow, process, and sell Cannabis within their borders.
Local Control: Many states allow municipalities to ban or restrict Cannabis businesses, a practice that's likely to continue.
State-Specific Rules: Expect continued variation in things like possession limits, home cultivation rights, and public consumption laws.

This means Cannabis businesses will still need to navigate a patchwork of state regulations, especially if operating across multiple jurisdictions.

Federal oversight expansion

Rescheduling will bring increased federal involvement, primarily through agencies like the FDA and USDA:

FDA Oversight: The Food and Drug Administration will likely play a larger role in regulating Cannabis products, especially those making health claims. This could include:

Product safety standards
Labeling requirements
Marketing restrictions
Clinical trial oversight for medical claims

USDA Involvement: The U.S. Department of Agriculture may become more involved in setting standards for Cannabis cultivation, potentially including:

Organic certification processes
Pesticide use guidelines
Crop insurance programs

Federal Quality Standards: We might see the development of federal Good Manufacturing Practices (GMP) specific to Cannabis, similar to those in the pharmaceutical industry.

Taxation Changes The regulatory shift will likely bring changes to the tax landscape:

280E Reform: With Cannabis off Schedule I, we could see the end of 280E's application to Cannabis businesses, allowing for normal business deductions.
New Federal Taxes: However, don't be surprised if new federal excise taxes are introduced, similar to those on alcohol and tobacco.
State Tax Adjustments: States may need to adjust their tax structures in response to federal changes and to remain competitive with neighboring states.

Banking and financial services regulations

As banking opens up to the Cannabis industry, we'll see new regulatory frameworks emerge:

FinCEN Guidelines: Expect updated guidelines from the Financial Crimes Enforcement Network on how banks should work with Cannabis businesses.
Federal Reserve Policies: The Federal Reserve may need to create new policies for Cannabis banking, potentially including special reporting requirements.

Consumer Protection

With Cannabis becoming more mainstream, expect an increased focus on consumer protection:

Age Restrictions: Federal guidelines on age restrictions for Cannabis purchases may be implemented.
Product Testing: More rigorous and standardized testing requirements for potency, contaminants, and consistency.
Advertising Restrictions: Similar to tobacco, we might see federal restrictions on how Cannabis products can be advertised.

Environmental Regulations

The Cannabis industry's environmental impact will likely face increased scrutiny:

Energy Use: Regulations on energy consumption for indoor growing operations.
Water Usage: Guidelines on water use and runoff, especially in drought-prone areas.
Packaging Waste: Potential regulations on packaging materials and recycling requirements.

Implications for Cannabis Businesses and Financial Professionals

This evolving regulatory landscape will have significant implications:

Compliance Costs: Businesses will need to invest in robust compliance systems to navigate federal and state regulations.
Interstate Commerce Complexities: As discussed earlier, regulations around interstate Cannabis commerce will add new layers of complexity.
Increased Need for Expertise: Cannabis businesses will rely heavily on legal and financial professionals to navigate this new regulatory environment.
Reporting and Auditing: More complex regulations will require more sophisticated financial reporting and auditing processes.

As accountants and financial advisors in the Cannabis space, we'll need to:

Stay up-to-date with rapidly changing regulations at both state and federal levels.
Help clients implement systems to ensure compliance across multiple regulatory frameworks.
Advise on the financial implications of new regulations, including tax changes and compliance costs.
Assist in preparing financial statements that meet new federal standards while still addressing state-specific requirements.

The post-rescheduling regulatory landscape for Cannabis will be complex and dynamic. While it may resolve some current issues, it will undoubtedly create new challenges. Our role as financial professionals will be crucial in helping Cannabis businesses not just comply with these new regulations, but thrive within them.

Investors, Valuations, and Due Diligence: A New Era of Scrutiny

The rescheduling of Cannabis is set to dramatically alter the investment landscape. Let's dive into what this means for investors, company valuations, and the level of due diligence we can expect to see.

Investor landscape evolution

In the early days of the Cannabis industry, many investors got burned. They jumped in quickly, excited by the potential of this new market, without ensuring proper controls or good books were in place. The result? A lot of lost money and increased wariness among investors.

Today's Cannabis investors are much more cautious and demanding. They're looking for businesses that can demonstrate:

Solid Financial Controls: Investors want to see that a company has robust systems in place to track and manage its finances accurately.
Compliance with Regulations: Given the complex regulatory environment, investors need assurance that businesses are operating within the law.
Strong Governance: Clear leadership structures and decision-making processes are crucial.
Growth Potential: Investors are looking for businesses that can scale and adapt in this rapidly changing industry.

Perpetual Data Rooms: A New Standard

One of the key demands we're seeing from investors is the implementation of perpetual data rooms. These are digital repositories that contain all crucial business documents and are continuously updated. They include:

Permanent files like leases, insurance policies, and tax returns
Regularly updated financial statements
Bank statements and invoices
What we call a "permanent audit trail"

Having a well-maintained perpetual data room signals to investors that a business is organized, transparent, and ready for scrutiny. It's becoming a standard expectation, even for pre-revenue companies.

Valuations: The 280E effect

The potential elimination of 280E (the tax code that prohibits standard business deductions for Cannabis companies) could have a massive impact on valuations. Here's why:

Increased Cash Flow: Without 280E, Cannabis businesses could see their cash flow increase by 15-40%, depending on their effective tax rate and location.
Higher Net Income: The ability to deduct standard business expenses will significantly boost net income figures.
Multiplier Effect: These improvements in financial performance could lead to valuation increases of 5-10x almost overnight.

For perspective, imagine a dispensary currently valued at $2 million. If 280E goes away, that same dispensary could potentially be worth $16 million. That's a game-changing increase for owners and investors.

Enhanced due diligence

With higher stakes and more institutional investors potentially entering the market, we can expect to see a much more rigorous due diligence process. This will likely include:

Detailed Financial Audits: Investors will want to see clean, accurate financial statements that can withstand scrutiny.
Compliance Checks: Thorough reviews of all licenses, permits, and adherence to state and local regulations.
Operational Assessments: Deep dives into business operations, supply chains, and growth strategies.
Management Team Evaluation: Close examination of the experience and track record of key personnel.
Market Analysis: Detailed assessment of the company's position in the market and growth potential.

Implications for Cannabis businesses

To attract investment and maximize valuations in this new landscape, Cannabis businesses need to:

Implement Robust Financial Systems: This includes detailed record-keeping, regular financial reporting, and strong internal controls.
Maintain Impeccable Compliance: Given the industry's regulatory complexities, businesses must be able to demonstrate strict adherence to all applicable laws.
Develop Clear Growth Strategies: Investors will be looking for well-thought-out plans for scaling and expanding the business.
Build Strong Management Teams: Having experienced, credible leadership will be crucial for attracting investment.
Prepare for Scrutiny: Businesses should be ready for a level of due diligence that may be more intense than they've experienced before.

The role of Cannabis Accounting Professionals

As accountants and financial advisors in the Cannabis industry, our role becomes even more critical in this evolving landscape. We need to:

Help clients build and maintain those all-important perpetual data rooms.
Ensure financial statements are audit-ready at all times.
Assist in developing financial models that can withstand investor scrutiny.
Guide clients through the complexities of valuation in a post-280E world.
Prepare clients for the level of due diligence they can expect from sophisticated investors.

Our DOPE CFO Certified Advisors have helped clients raise over $10 million in cash. We know what investors and banks are looking for, and have access to several funding sources that are ready to provide capital.

Give your clients the full suite of CFO services that they deserve by becoming a DOPE CFO Certified Advisor today.

Click here to learn more.

The rescheduling of Cannabis represents a massive opportunity for the industry, potentially unleashing a flood of new investment. However, it also means Cannabis businesses will be held to higher standards than ever before. Those that are prepared – with clean books, strong compliance, and clear growth strategies – will be best positioned to attract investment and achieve favorable valuations in this new era.

Descheduling vs Rescheduling

It’s also important to note that descheduling is different from rescheduling. Descheduling means you take it completely off the schedule. Ideally, that’s what we’ll see happen with Cannabis in the future. It's what happened with hemp and CBD back in 2018. If it comes off the schedules, then it could still be regulated by the state. For example, alcohol is not on schedules one to five and is regulated by the state, and can't be sold to minors. Different states have different laws. You know, in my home state of Oklahoma, you know, you couldn't drink craft brew during my years of growing up.

Cannabis rescheduling will result in a lot of changes…

But how will those changes affect accountants, bookkeepers, CPAs, and their clients?

How This Will Affect Accountants, Bookkeepers, CPAs, & Our Clients

The rescheduling of Cannabis will bring significant changes to the industry, and these changes will undoubtedly impact the work of accountants, bookkeepers, and CPAs serving Cannabis clients. The good news is that the fundamental principles of GAAP accounting will remain the same. This means that the core accounting practices you've honed will still be applicable, even as the industry undergoes transformation.

Accounting Changes

280E and complex returns

The good news for us is - whether it's a farm, a processing plant, a manufacturer, a distributor, or a retailer - GAAP accounting is the same. It has nothing to do with the tax code and will remain complex and difficult to navigate. There will still be a need for cost accounting and the industry will still be multi-vertical. Just like every other complex niche in the US that is fully legal, like oil and gas or e-commerce or software, Cannabis will need niche experts to support their accounting. We’re likely to see lots of startups, cap raises, M&A, and exits as restrictions on the industry loosen. Things will heat up really quickly when rescheduling happens.

Preparing taxes for Cannabis businesses is set to become more complex with rescheduling. Currently, due to IRC Section 280E, Cannabis businesses can't deduct most ordinary business expenses on their federal tax returns. However, they can include costs directly related to producing or acquiring their product as Cost of Goods Sold (COGS).

Determining COGS for Cannabis businesses is already complicated. We must use GAAP cost accounting principles, specifically the rules under IRC Section 471, to calculate COGS accurately. This is crucial because COGS is considered a reduction of gross receipts rather than a deduction, allowing Cannabis businesses to recover some costs despite 280E restrictions.

If Cannabis is rescheduled and 280E no longer applies, tax returns will likely become even more intricate. Businesses will need to navigate standard corporate tax rules, including various deductions and credits that were previously unavailable to them. This shift will require a more comprehensive approach to tax planning and preparation, potentially increasing the complexity of Cannabis tax returns.

Rescheduling and the Accountant’s Impact on Cannabis Company Valuations

To illustrate the potential impact of rescheduling on Cannabis company valuations, let's look at some data from leading multi-state operators (MSOs) in the industry. This information, compiled by the Green Market Report, provides a snapshot of current valuations and helps us project how these might change if 280E restrictions are lifted.

(Source: Green Market Report)

The chart shows various financial metrics for major Cannabis companies, including Enterprise Value (EV) to EBITDA ratios. These ratios are crucial for understanding how the market values these companies relative to their earnings before interest, taxes, depreciation, and amortization.

Currently, we see EV/EBITDA ratios for 2023 estimates ranging widely, from as low as 4.57x for Ascend Wellness to as high as 53.10x for Glass House Brands. This wide range reflects the current uncertainty and variability in the Cannabis market.

However, if 280E restrictions are removed, we could see a significant boost to these companies' EBITDA figures. Industry analysts, including those at Cannabis Business Executive, suggest we could see valuation multiples increase by a factor of 5 to 10 times current levels.

To put this into perspective, let's consider a hypothetical example. If a Cannabis dispensary is currently valued at $2 million, the elimination of 280E could potentially increase its value to $16 million - an 8x increase. This dramatic rise would be driven by the sudden ability to deduct ordinary business expenses, significantly improving profitability and cash flow.

This potential for value creation is not just theoretical. It represents real opportunities for business owners, investors, and even employees in the Cannabis industry. It also underscores the critical importance of proper financial management and reporting in the sector. As accountants and financial advisors, our role in helping Cannabis businesses navigate this potential transition and maximize their valuations will be more crucial than ever.

Is it going to be Challenging for Cannabis CFOs?

The road ahead for Cannabis CFOs is undoubtedly challenging. Regardless of whether Cannabis is descheduled or rescheduled, the industry will remain highly complex. CFOs will need to navigate extensive compliance requirements, limitations in vendor services, and the integration of numerous Cannabis-specific software solutions. The industry's rapid growth and evolving regulatory landscape will further compound these challenges.

However, these challenges also represent an exciting opportunity for growth and innovation. As the industry matures, we can expect to see the development of more sophisticated accounting tools and industry-specific guidance. The increasing demand for skilled professionals in Cannabis accounting and finance underscores the potential for a rewarding and impactful career in this field.

Despite the complexities, the Cannabis industry presents a promising future. Even without federal rescheduling, the industry has experienced massive growth, with states like Ohio and Minnesota recently legalizing Cannabis. The potential for full legalization in Florida and continued growth in states like Michigan and Massachusetts further highlights the industry's upward trajectory. This growth translates into a wealth of opportunities for accountants, CFOs, and CPAs willing to embrace the challenges and complexities of this booming and exciting industry.

Our nationally recognized Cannabis accounting program has seen a surge in students eager to tap into these opportunities, even in states where Cannabis remains illegal. This demonstrates the growing recognition of the potential for success in Cannabis accounting and finance, regardless of location. The evolving Cannabis landscape is ripe with possibilities, and those prepared to navigate its complexities will be well-positioned to thrive.