Whether in California, or anywhere else in the US, cannabis businesses must be focused on maintaining compliance with local, state and federal regulations. With AG Sessions’ recent action rescinding the Cole Memo, it is more important than ever to be operating, at all levels, within regulatory guidelines. As a cannabis business owner or operator, proper bookkeeping and recordkeeping will be the first line of defense if any issues arise.
Maintaining comprehensive records is more than a good business practice. It will help you stay on top of purchases, sales, and maintain appropriate stock levels. Additionally, and perhaps most importantly, maintaining records is also required by the IRS to validate tax filings and ensure compliance. Following are some recordkeeping tips and associated requirements established by Californian and federal regulators.
Keep Records Essential to Legal Operation On-Hand
In states like California, Washington and Colorado, attaining and maintaining proper licensing is the first step toward legal cannabis business operation. With that in mind, it is essential to keep a copy of the most up-to-date licensing documents handy so that you can produce requested documents immediately upon request from regulatory authorities. Other records worth keeping close at hand include:
- Business documents, including tax record, Secretary of State Filings and operating agreements.
- Employee documents, including W4s and I9s, security clearance badges, and environmental certificates.
- Place of operation documents, including visitor logs and facility diagrams.
Implement an Enterprise-wide Recordkeeping System
Maintaining detailed records may seem burdensome, but proper records can not only save you thousands in the case of an audit, they can also keep your business in operation if a regulatory issue arises. Detailed records must be kept for at least four years and not maintaining records may be considered negligence or intent to evade taxes and result in penalties. Other records must be kept for varying lengths of time, so it is important to know retention requirements and follow them closely. Other factors to consider when designing or implementing a bookkeeping system include: paper vs paperless functionality, strength of security protocols, and strength of back-up tapes and files.
Regulators require cannabis businesses are required by law to keep records so they can verify the accuracy of your sales and use tax and cannabis tax returns, and determine how much tax is due. Examples of business records to keep include:
- Sales invoices and journals
- Resale certificates
- Shipping documents
- Purchase invoices
- Bank records
- Purchase orders and journals
- Tax returns
There are many electronic recordkeeping systems available with features specific to the cannabis industry. For more guidance on a system appropriate for your business, feel free to contact us to schedule a consultation.
Document and Report Major Cash Transactions
In this cash-heavy industry, cannabis business must maintain accurate reports of cash transactions, including sales, employee wages, and vendor payments. When receiving more than $10,000 in cash from a single buyer or in two or more related transactions, reporting is required by the IRS. Report this transaction via Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
Follow MAUCRSA Record Requirements
The Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) requires a licensee to keep accurate records of commercial cannabis activity for a minimum of seven years. Every sale or transport of cannabis/products from one licensee to another must be recorded on a sales invoice or receipt.
Sales invoices and receipts may be maintained electronically and must be available for review and must include:
- Name and address of the seller
- Name and address of the purchaser
- Date or sale and invoice number
- Kind, quantity, size, and capacity of packages of cannabis/products sold.
- The cost to the purchaser, including any discount applied to the price shown on the invoice.
- The location of transport of the cannabis / cannabis product unless the transport was from the licensee’s location.
- Any other information specified by the licensing authority
For more guidance on tax and payment requirements in California, see our comprehensive guide.
Maintain Records with Details of Cost of Goods Sold (“COGS”) Deductions
Federal law § 280E prohibits tax deductions and credits for business activities related to the growth, transport or sale of cannabis. Cannabis businesses with other federally-legal business activities are allowed to deduct costs of goods sold (COGS) related to the legal parts of their businesses. To gain this deduction, we recommend that businesses physically separate the area dedicated to the “legal” side of business. This way you can maintain records that substantiate COGS deductions.
Following the steps listed above is just the start toward building a comprehensive recordkeeping system that will not only keep your business humming, but will also help protect against potential operational concerns or conflicts with the IRS or regulatory bodies. For more information on recordkeeping best practices or to schedule a consultation, feel free to reach out to us.