Ep. 16 | Navigating the Cannabis Tax Maze: A Guide for Tax Pros
Download MP3Welcome to the Mr. R Show, presented by the MRR Institute. This podcast is designed specifically for tax professionals looking to scale and modernize their practice by maximizing revenue through resources. Join us as we explore expert strategies, innovative tools, and actionable advice to help you navigate the evolving landscape of the tax Whether you're aiming to grow your business or enhance your client experience, you're in the right place. Now let's get to the show and transform your practice together.
John Tripolsky:Hey, everybody, and welcome back to the mister r show. As I sometimes put a twist on it, it is produced, edited, marketed, whatever we wanna call it, by the MRR Institute. And I would love to take credit for all the geniuses that we have on this show as far as for guests. And, of course, the the, the bald fancy tax guy that I've known for 2 and a half decades, Chris Pacquero. Buddy, welcome back to your own show, man.
John Tripolsky:I gotta I gotta give you credit. You you do show up every time.
Chris Picciurro:I try to, John. It's challenging, but, you know, no. I'm excited to be back.
John Tripolsky:Oh, I hope I hope you are. But, you know, of course, for the for the sake of people getting CP for listening to this, can you imagine if me, the marketing guy, tried to talk for 50 some odd minutes on just one topic? And it actually I don't I wouldn't even say it would be entertaining. It would fall so flat on its face. People wouldn't get any credit for it.
John Tripolsky:They'd get credit for making it all the way through, but, you know, it it wouldn't actually be recognized by any sanctioning body. So I you know what? I'm really excited for this topic today, not because it's it's a lesser known thing, we'll say, topic industry or the subsegment of an industry. But there there's a lot more buzz around this now, I think, than we've seen in the past, which sometimes when there's more interest in this, sometimes there's a little bit more misinformation, or maybe there's better information. I I don't know.
John Tripolsky:I got a host a a host of questions here. And, Chris, I know you me and you have talked about this in the past, and some of it so there's probably some crazy stories out there. So, again, I I look forward to talking about cannabis and taxes today as it relates to the tax world.
Chris Picciurro:Absolutely. I I'm passionate about about tax professionals and accounting professionals, CPAs, enrolled agents carving out a niche that they have a that they have a passion for because I think that, one, it enhances your relationships with clients. We always say in our practice, people don't care how much until they know how much you care, and so we are really honored. We've been chasing this young lady down for a while to cut get her on the show, and and I'm so excited to have her. I I sometimes, to be quite honest, we'll we'll have we'll do a show, and I'll I'll know almost all the information that we're talking about just from my over 20 years of experience.
Chris Picciurro:But I'm I know I'm gonna learn a lot today just like everyone listening, and I would listen to this even if you didn't get a CPE. So I'm I'm excited, and we have a fellow Michigan CPA joining us today. And if you're from Michigan, you might be from the Tri City area, Bay City, Saginaw, Midland, Flint. Actually, that's 4. Right?
John Tripolsky:Yeah. That's 4. But The Quad the Quad City area.
Chris Picciurro:The Quad City. Yeah. And back in the day, I don't know if Karina remembers this, if since growing up there, when so when I was younger, we had a really small cottage and we owned with my aunt and my grandmother up in Caseville, Michigan, which is the tip of the thumb, and it was between Caseville and Port Austin. We had some ratty old TV, and we got one channel. WNEM channel 5, which was out of Bay City Second on Midland Flint, and that's the only channel we had.
Chris Picciurro:So I saw a lot of that, and I can remember Labor Day. I was upset because of what was on for 24 straight hours, the Jerry Lewis telethon, and I didn't get to watch my sports. So coming from that beautiful area, Karina Miller, thank you for joining us, and we really appreciate you.
Kareyna Miller:Yeah. Absolutely. I'm excited to be here. Thank you for having me on the show.
Chris Picciurro:So Corinna has I've like I said, I've gotten to know her through the Michigan Association of CPAs. She has done a fabulous job presenting for our group and leading the the the I almost said task force, but I know it's a resource group. Right? Not they renamed it, I believe. The cannabis industry resource group has led panel discussions and presented to her peers.
Chris Picciurro:But before we dive into to cannabis and taxes, can you tell us a little bit about your history? How you became well, we know you become you become a CPA by doing the experience and and passing the tests. But what led you to become a CPA and, and and what what path you took to to this point?
Kareyna Miller:So in in college, I had started off as a finance major and had planned to get a minor in Spanish, mostly just out of interest. And I had done well enough in the accounting 101 course that everyone has to take in business school, and the professor, he had suggested that I go into accounting instead of finance. Something I hadn't really considered, but at the the school I went to, recruiters were were very active. It seemed like like the better path at the time. I had got my start with Plant Maria in their audit section.
Kareyna Miller:Did that for a little over a year and really didn't like it at all. I had had more of, like, a small business background. High school, college had had always been involved in small businesses and kind of that entrepreneurial path. So I end up leaving plant and then went for a number of years and worked for a a company that was in the office technology space. So during that time, I spent a lot of time at different types of businesses, saw their workflows and and that, and decided to get back into accounting for my own business purposes and look at a way to kind of incorporate that virtual accounting format.
Kareyna Miller:Office technology, you can hit a button and scan things and everything just kinda happens. So that that was what drew me back, kinda that that idea at the time, everything could be that easy. That didn't it was a it was a good idea, but at the time so this was, like, 2014. People didn't didn't care about virtual accounting. It wasn't something anyone wanted.
Kareyna Miller:So that's how I ended up approaching the cannabis industry initially is I had some personal background in it. I knew the industry was a little bit more forward thinking, and their virtual accounting and and bookkeeping model made sense for them. I mean, that that was a a perfect fit for what they would want in a service provider. So that so that's that's kinda my path. I actually left public accounting for, a good chunk of my career, but have been back since, let's let's say, late 2016 when I started to really approach the cannabis industry.
Chris Picciurro:Awesome. And is it true that you're a Oakland University Grizzly alum?
Kareyna Miller:Yes.
Chris Picciurro:They had a pretty good basketball team this last season, didn't they? A lot of excitement.
Kareyna Miller:They yeah. Basketball's always been been their better better sport, it seems.
John Tripolsky:I'm just glad you didn't say you were as Michigan State Spartan fan because Chris has been trying to trying to take over this podcast and I believe the teaching tax flow and too by, a, bringing on a bunch of Michigan State people in that in Ann Arbor, so you know we don't click. But then also all these Pittsburgh Penguins hockey fans, which we're not gonna go down that rabbit hole.
Chris Picciurro:Well, Jonna, the the person that you're in question, you brought that person podcast. She did an amazing job, and the reason she did so well is because she's a Spartan alum. But we're excited. My wife actually got her master's at Oakland University, and it's a great place. So but that's cool.
Chris Picciurro:And and Foot and mouth.
John Tripolsky:Foot and mouth, buddy. Foot and mouth. I I am I cannot say anything else the rest of the show.
Chris Picciurro:But the thing is it's really cool that you I think that it's really neat that you charted your own path because I think a lot of times, it's like, okay. Go work at this big CPA firm, and and this is the path that you you know? And and, obviously, that wasn't just like myself, I worked at a large regional firm. They're now a national firm. I it just didn't fit for me.
Chris Picciurro:I got my did my time for lack of better term, and and then, ultimately, I I was very entrepreneurial, so I wanted to wanted to do that. So but that's cool, and I love that you're specializing in a in an industry. So let's jump into the cannabis industry, really looking at this from a tax professional and then in a CPA mindset. And and before we get started, I wanna just kinda talk through if someone came up to you and said, well, how do you describe the cannabis industry from a accounting perspective, tax perspective? What are your typical clients that you're working with?
Chris Picciurro:What do do you have any are they they fit into categories kinda like with real estate. We've got buy and hold people. We got house flippers. We've got different types of real estate that they're deploying.
Kareyna Miller:Yeah. There's there are different types of groups. So, you know, my my focus is mostly with smaller businesses. So people who it's it's their own money or maybe they have a an investor that they're they're close with. A lot of times, they've they own the real estate.
Kareyna Miller:So I so the groups I work with are are, what I would say, one one type of client. There's also people who who wanna get in and see that there's a lot of money to be made or or think there's a lot of money to be made and and kind of look at it as more of that that flip scenario. Those those, I would say, to a practitioner, be careful of if if you've got you have to look at what your mindset is. So it's it's such a such a new industry. There there's people who are in it for the long haul.
Kareyna Miller:There's people who are are bootstrapping it. There's people who are able to to finance their real estate with the bank and and have more of that traditional model. There's people who wanna make a quick buck. So there there is there is advisory that's needed depending on which situation it is. But I I think if you're looking to build a a practice around it, you you have to to look at the long haul.
Kareyna Miller:So it's it's not just, oh, we're gonna jump in and have all this business coming. It's it's tough. The the industry from the outside looking in, I think, maybe looks somewhat glamorous, or maybe it it did a few years ago at least. But it it's it's tough. I mean, there there's so many regulations at the state level.
Kareyna Miller:Inspections, I mean, they're they're subject to unannounced inspections. You take a traditional business and in bookkeeping once a month where you're you're making a journal entry to record all the the receipts and everything that came in. Cannabis, it's transaction by transaction. And if if you don't have a receipt, you're you're potentially violating the rules. So it's it's very, very strict.
Chris Picciurro:Okay.
Kareyna Miller:So I I think
Chris Picciurro:So there's a lot more regulation Yes. Than as we would expect than than most industries.
Kareyna Miller:Yeah.
Chris Picciurro:And you've gotta navigate through that. I wanna talk about the accounting and bookkeeping side first before we'd walk into tax. Before I'd walk into that, as far you know, a lot of times with niching, you're not necessarily geographically centered with your client base. So for our in our practice, real estate's our niche and the vast majority of clients don't live in the same city or even state that that I live in or or my business partner lives in. How is that with Canvas?
Chris Picciurro:Because I I'd imagine the rules are so different in each state. Are you finding that most CPAs that that work in this industry reside in the same state that the clients do, or does it matter?
Kareyna Miller:I I think for the most part, they do or that's where their client started, and then maybe their their client who's in Michigan decides to get into the Minnesota market or or over in the New England market. I I think, federally, the the rules are the same, but each state has their own set of rules. So, like like, Michigan, they they have their own attestation they have to go through every 3 years. So whoever's doing the accounting and bookkeeping has to be familiar with that process so that the client is able to to get through that attestation successfully, produce the reports and everything that are needed. If you're not familiar with the state specific rules, you're probably gonna miss some of those things.
Kareyna Miller:So I think for the most part, you're you have the clients and it's it's a local CPA. But there is as more and more states come on board, you have CPAs who have experience started in Colorado, California. Now Michigan has has had the industry for a number of years. That's how the branching out to other states is happening.
Chris Picciurro:So that's so in Michigan specifically, we understand that it's a state by state. The the law the rules and laws are state by state. Just to give you an idea, you you touched on something that I was gonna ask about. In our in our industry, a lot of contractors need some type of attestation service. They don't necessarily need an audit.
Chris Picciurro:Just depends on on where they're at. Can you talk about what type of attestation service is gonna be required? I know you mentioned every 3 years, but kinda walking through that process, do they if someone's starting a new someone's starting a new business, is there bonding, or what kind of what on the compliance side and the attestation level should should one CPAs be aware of? Because, ultimately, I I bet many of the clients don't have an they probably don't know the difference between an audit review or compilation or anything like that, and they might not even know they have that.
Kareyna Miller:Yeah. And so so the state of Michigan calls it the annual financial statement. So CPAs, we think of preparation, they just need to produce a a balance sheet and income statement. What it what it is is a set of agreed upon procedures. The state publishes a a workbook.
Kareyna Miller:It's it's a Excel workbook with procedure on each tab. They look at revenue to make sure that what you're record recording in your your accounting system, your general ledger agrees to what's in the state's inventory tracking system. They look at agreements, so, like like, a rental agreement, a lease agreement. If your lease agreement says you're gonna pay 10,000 a month for the facility and you don't pay 10,000 a month for whatever reason it is, you've got to explain they look at your vendors. So part of 2 of the procedures involve pulling samples for vendor transactions.
Kareyna Miller:They look at ownership transactions. They've they've gone through 2 sets of designing the procedures. So this current procedure set is a couple years old now, but I I think they designed them to to look what's for what is important to them at the regulatory level. So they don't care that your profit and loss is correct or presented correctly, like like in an audit. They care from a compliance perspective that you've got support records, your your revenue is reconciled, or if there are any differences, you know what they are.
Kareyna Miller:You're following your agreements. Any agreements that you have from a a business perspective or an ownership perspective are the same agreements you have on file with the regulatory agency. So so those are the types of things they're trying to drill down on with those procedures.
Chris Picciurro:Right. So it's almost like I yes. It's operational as much as it is financial, it sounds like is.
Kareyna Miller:Exactly.
Chris Picciurro:And and is that requirement each year or every every 3 years, or does it depend on, in Michigan, the revenue of the entity? Or how does
Kareyna Miller:So it used to depend on revenue in terms of the the procedures. It doesn't anymore. So it so it is every 3 years. The the licensee, when they start up their business and they they get their license, they should get a letter that tells them when their first AFS report is due. Usually, it's 3 years out.
Kareyna Miller:So if they started operating in 2024, first AFS is due in 2027. The date that your report is due, you've gotta look back 18 months, and that is the start of your your AFS period that they're gonna look at. So, like, a new business, sure. They're the state is giving them some time to to get their accounting system in order and and make sure they're set up correctly. But then they'll look at a full year's worth of information.
Kareyna Miller:So reports due December 31st this year, we're we're looking at July 1st 2023 through June of 24 for those procedures.
Chris Picciurro:Does a CPA have to perform those procedures, or can someone else
Kareyna Miller:CPA has to do it. CPS be independent, so it is a it falls under an attest engagement. CPA has to be enrolled in peer review so that the the state has a form you've got to fill out as well acknowledging you're in peer review. That that's where some practitioners, I'd say, if if you're if you have a client that comes to you and says, oh, can you do my my AFS? I mean, it's just an Excel workbook.
Kareyna Miller:Anybody could fill it out, really. So you you've gotta be careful, though, because it is it is truly in in a test engagement. And once you do one, then you're you're subject to these different compliance issues for your firm as well.
Chris Picciurro:We talk about it all the time. There's no such thing as an easy tax return. There's there it's just if someone says it's easy, then that does They're not they just don't have a concept of what really goes into it, and it's not just that. It's it's a whole system of checks and balances that you have to be a part of if you're gonna offer those services. So so every 3 years with an 18 month look back, and then they then as as they FS.
Kareyna Miller:Yep. And they should get plenty of communication from the CRA. They get letters and notices, and they they just have to check check their their mail or their email, and they they'll get the notices of when it's due.
Chris Picciurro:Now from a bookkeeping perspective, obviously, the core of it is having a bank account. So is it is it is that a challenge for for some of the clients, some of your clients, or can you kinda walk us through some again, this is a tax a CPA tax professional that's that's being approached by someone that's it that's in the cannabis industry looking to be in it. What are some of the challenges that that tax professionals and CPAs are facing when it comes to a bookkeeping system?
Kareyna Miller:So banking, I would say, at least for Michigan, is is not an issue. The they do charge anywhere from 250 to I've seen upwards of $2,000 a month for a bank account, but there there's a number of banks who will work with the companies now from from an accounting perspective. So I'm I'm gonna I'm gonna talk about, like, from a QuickBooks perspective. Still can import a bank feed, connect the bank. That that part isn't any different.
Kareyna Miller:The banks usually, though, require their own compliance. So I I've got a few clients who have to provide monthly financial statements to their bank. I've got one that the bank has a an API connected to their QuickBooks so they can get all this information whenever they want to. So so that that's a challenge. You you do need to make sure you're, one, keeping up with things because the the banks give some leeway, but a small small business has to deliver financial statements every month to to their bank just to having a bank account.
Kareyna Miller:So that that's a challenge. The the bookkeeping side and the tax side, they're to to me, they're they're almost 1. So so all of the accounting, at least for the the size of businesses that I work with, I I don't work with any that exceed the the gross receipts threshold. But from a, small business perspective, the the chart of accounts aligns with regulation 1 dot 471 dash 11. It's that's the framework I used for the chart of accounts.
Kareyna Miller:So the the tax the the accounting and the tax are are 1. All the financial statements are on the tax basis. There's very few adjustments that I'm making other than, like, meals and entertainment in that when I go to prepare the return. I guess the the the biggest difference for cannabis is all of their their inventory type expenditures. You can't just treat them as an expense like you would for other businesses, supply supplies and materials or or what have you.
Kareyna Miller:Those get treated as inventory costs. So depending on on which regulation you're following, usually, 471 dash 11 or you can go some businesses have gone the 471 c route. You've gotta design the accounting system to to support your tax position. If you're capitalizing and capturing a portion of your rent instead of an expense, you're capitalizing it to your inventory and then able to deduct it as cost of goods sold. You've got to show that happening in in the accounting system.
Kareyna Miller:It's not just a a once a year tax entry or once a quarter. It's it's happening monthly or as transactions are coming through, they're being accounted for on the tax basis.
Chris Picciurro:Well, it's hard enough to get annual financial statements together, let alone monthly. So that's that's a challenge. Are you finding clients typically working with banks more, credit unions more? Is it just kind of a mix? And because, obviously, that's a very, very important part of this.
Kareyna Miller:Probably more credit unions, Just kinda thinking through real quick the different the different financial institutions in my head. It's probably not too many more credit unions than banks, but the the credit unions, I would say, have a larger presence.
Chris Picciurro:Gotcha. So could we talk a little bit about so, obviously, if they're with a bank, they can they can use are they allowed to take credit card, debit cards, or is it all cash basis?
Kareyna Miller:They do usually let them have a debit card that that just connects to the bank account. For payments, a lot of times, it's ACH. There's there's some platforms that are cannabis specific. So, like, LeafLink is one of them where it's like a third party system that helps facilitate payments. From the retailer side, some do take debit and credit cards.
Kareyna Miller:I would say that's where it's a little bit more of a gray area. There there's plenty of of credit card processors out there willing to say, oh, yeah. We support cannabis. Good. But there have been issues where they're not compliant and then they they get shut down.
Kareyna Miller:But I have seen more and more debit card use at least in in the retail stores.
Chris Picciurro:Then another another thing that I I've wondered about processing payroll. How how is that how does that work? I mean, it say, how does it work? We know how it works, but are there softwares that that are that are cannabis industry friendly? Do they have to pay people in cash or just gross it up?
Chris Picciurro:9.41 payments and that sort of stuff. Because I feel like in where's I mean, where's this industry come and even in the last, like, 3 to 4 years as far as is compliance gotten a little easier, harder?
Kareyna Miller:For that, I would say it's not gotten harder. It's probably more accepted now. It just it just kinda is what it is. You you have to do all these these things to to operate. If you don't, then you're gonna get fined or you're gonna lose your license or you're gonna go on a business or or something.
Kareyna Miller:The the payroll, it's it's funny. So Gusto is cannabis friendly. Books is not. QuickBooks will will shut you down. There's there's Paragon payroll.
Kareyna Miller:I mean, there there's some different providers out there that are are cannabis friendly, and you can process and use payroll just like any other company can. Direct deposits are fine. You don't see too much cash. There's there's some, like, more in the vendor, buyer, seller of the bulk product. You see some cash there.
Kareyna Miller:When there is cash, they have to have a secured vehicle take it to the bank. So they they usually don't just let it let it sit there. They've gotta have a secured armored vehicle contract, and they they pick it up. Same with the retailers. Usually, every day, they're they've either got a smart safe that deposits or and then they're having their scheduled pickups of the cash.
John Tripolsky:And, Corinne, if I could so, Chris, you asked a lot of good questions as far as for the I guess we'll call more the tax tax technical stuff. So this is me again not being the tax professional at all. So I have all kinds of questions related to this. I mean, one of them I mean, I know we kinda touched on certain areas and and kinda treaded water a little bit, but really is putting it as direct as I possibly can. Right?
John Tripolsky:So when it comes to taxes, we're talking at a federal level. Do we see a lot of changes? Or I how how do things even go on when something is considered federally not legal? I won't say the word that starts with an I. But at a state level, it is.
John Tripolsky:So it's you mentioned a lot of things about it sounded like just kind of transferring, if if you will, to cost of goods sold, etcetera, etcetera. But, frankly, I mean, the IRS is federal. Like I said, federally not legal. So how how does that work, actually?
Kareyna Miller:So I I would say the IRS's positions have have been built off of court cases over the years. So, like, for for Michigan, they they didn't even get into this until 2,000 16. You had Colorado already operating. You had California operating. I think there's a case that goes back to 2002, maybe.
Kareyna Miller:I I'd have to look. But they 2 80 e and these issues of it being an illegal business came into play pretty early on. Now as far as it being federally illegal, the IRS, they've got guidance out there now. They they recognize it. They they call out these issues.
Kareyna Miller:As long as you're following the tax code, I mean, you're you're following the tax code. So so 280 e says you can't take expenses and deductions. 471, at least for a a grower and a processor, there's a whole list of things you can capitalize to inventory. So I I think at least on the the grower and processor side, re retail's a different a different the tax laws hurt retail pretty bad. I I would say growers and processors, as long as you're following the rules and you're doing it correctly and you are doing your accounting correctly, following the same methodology, you have your support.
Kareyna Miller:If it's if it's challenged, it's you're you've got that support to to hold it up and you're you're following what the tax code says.
Chris Picciurro:So on on your end, are you working with both retailers and suppliers and growers?
Kareyna Miller:I I prefer the grower and processor side.
Chris Picciurro:Processor. Yeah.
Kareyna Miller:I I think there's more there's more opportunity for advisory and being able to to work within the tax code. The retail side for them, they they don't have cost. They're capitalizing the inventory. Their inventory is already already ready on their shelf. So it's a lot harder for them.
Kareyna Miller:They can't they can't do anything with their payroll costs. They can't do anything with their their marketing. They're
Chris Picciurro:Right.
Kareyna Miller:They're not getting depreciation for for their store and and their furniture and and all that. It hurts retailers. The clients I work with, any retailers that I work from an accounting and advisory perspective, they they also have a growth facility. I try to stay away from sole retailers. They just they're they're tough to work with.
Kareyna Miller:There's not there's not a whole lot you can do for them and they're they're the ones who struggle the most cash flow wise, I would say.
Chris Picciurro:Yeah. I was thinking of that, one, they have tons of transactions, and we're gonna jump into this in just a couple of minutes. But, ultimately, they're they're very we'll jump into the nuts and bolts, but it's very limited to what they can take as a deduction to offset their income.
Kareyna Miller:Correct.
Chris Picciurro:And I was thinking, gosh, if their margins, even if let's say they their margins are 70% profit margin based on cost of goods. So if they're paying tax on 70% of their income and your tax rate's even 30%, there doesn't there's not much meat left on the bone for anyone else. It's hard to I would imagine it's very hard to survive as the the tax laws are right now for a a retailer. With the growers and processors, you're right. They have the opportunity to capitalize I should capitalize or whatever, allocate within the code expenses towards inventory, and we know that inventory eventually ends up as cost of goods sold.
Chris Picciurro:And that's why I I was just thinking of the retailers. I mean, how many retailers don't even make it to their their their 3rd year of that they need that AFS?
Kareyna Miller:Right. Quite a few. You see a lot of storefronts change. The no one likes to talk about this, but a lot of retailers don't pay their bills. So they get they get product in on terms, sell it, but then all that money goes to paying their taxes or or wherever it goes.
Kareyna Miller:Retails retail is tough.
Chris Picciurro:Yeah. I mean, I'm just thinking if your retail if your margin if your profit margin with cost of goods sold 70%, and you're paying tax on 70% of your sales, but your real margin's 30%, which isn't bad when you rent and payroll, you can't survive. Yep. Because you don't have enough cash to even pay the tax. Just the numbers don't work.
Chris Picciurro:Yep. Unless you have someone that maybe owns the business and is willing, and you don't have to hire any toughie.
Kareyna Miller:Yeah. The the ones that I see, they're closely held so a lot so it is the owner working in the business. They are are not this whole 280 e thing. If it goes away, then that's gonna help them. But they they've gotta have a grower process facility now to to seem like they're they're able to survive.
Kareyna Miller:Otherwise, they they are gonna put their own money into it to keep it running at least until the tax issues go away.
Chris Picciurro:Oh, absolutely. Yeah. So they've got to vertically integrate this in this business to they've got to pick up both sides of the both margins up the up the distribution channel to even make it work, really. To your point, that's why probably nothing personal against retailers, but onboarding your clients gotta take a long time and a lot of effort. And if there's a big churn on the retailers because they simply can't stay in business the way the laws are written now, it's gotta that that's tough, and and then they're gonna struggle.
Chris Picciurro:So well, let's start. Let's shift over from it sounds like the the accounting side really sets up the tax side of things. And from a from a federal tax perspective, we'll jump into Michigan in a second and other states, but from a federal tax perspective, right now, and and I want you to correct me when I'm not if, but when I'm wrong, you based on let's assume someone's a sole proprietor, you simply take their income, put it on schedule c, and deduct the you fill out your cost of goods sold schedule and and and that's it. I mean, do you even
Kareyna Miller:That's it. Schedule c, I there's there's a little bit of what I'll I guess I'll call lack of guidance for a cultivator. Is it is it schedule off? Is it schedule c? Their their business code is a is an agricultural code, so I tend to defer to to schedule off in in that case.
Chris Picciurro:Yep. So schedule off or schedule c. And then if they have self employment income, are they allowed to make sub contributions just like nor other people or are they limited in offsetting any of that income with a health savings account or a sub contribution or anything like that?
Kareyna Miller:No. No. The the only limit to them is if you picture a schedule c, you're gonna you're gonna have all your costs listed, but then you're gonna have a big adjustment adding them all back. So it's it's really just the 280EPs that that affects them. There there is some some guidance out there.
Kareyna Miller:Some some attorneys have have published some information on it, but even, like, 199 a, that is that allowed? So depending on on how you interpret that, that that's a a consideration that that often comes up as well.
Chris Picciurro:Right. Gosh. I didn't even think about 199 a. That is are you seeing most most of your operators as sole proprietors or a single member LLC? Or are you I mean, I don't know how they could survive as a c corp or or I I don't know.
Chris Picciurro:I I'm or maybe yeah. What are you seeing as far as entity selection? I should frame it that way. Yeah.
Kareyna Miller:I kinda see a mix. I I have a mix of clients. I see more of the c corp structure on the retail side. I do have a a grow that's a c corp partnership, sole proprietors. So it's it it's a mix across the board.
Kareyna Miller:I do see some creative structuring. So a lot of times, you'll have the the cannabis entity or entities. And now you've gotta be careful because if you have, one business with multiple licenses, you've only got one AFS attestation. If you've got, a license in each per LLC, you've got reports for for each LLC. But a lot of times, you'll see, like, the the real estate structured separately.
Kareyna Miller:If they've got equipment that they're purchasing, they might structure an equipment rental company. So so that's where you kinda see some of the more interesting structurings coming in. But otherwise, for entity type, it's it's a mix.
Chris Picciurro:Right. It's across the board. Okay. That's interesting. I'm in now let's let's think about the tax the tax ramifications right now.
Chris Picciurro:And we can focus on Michigan because I know each state's different. But for Michigan, do you typically see an adjustment from their federal adjusted gross income to their Michigan adjusted gross income?
Kareyna Miller:Yes. So
Chris Picciurro:And we kinda talked to a practitioner through, and we could do some mishkas of how that would work and and a little bit of why why we you would do that.
Kareyna Miller:Yep. So it it's written into the adult use law that ordinary necessary expenses can be deducted at the state level for adult use businesses. So that doesn't include medical businesses. So there's there's 2 types of licenses, 2 laws, the medical and the adult use. The state department treasury says they decouple from 280 e for adult use.
Kareyna Miller:Technically, they don't decouple from 280 e. They partially decouple. So start up expenses still aren't allowed. There's a couple other things that the state still doesn't allow. But at least for adult use businesses, yes, there is an adjustment, and I I think it's even included in the the instructions now for the Michigan returns.
Kareyna Miller:Like, if you have a marijuana business adjustment, here's where you put it in in what you do. What businesses have to do if they have both medical and adult use licenses is account for those revenue streams and expenses separately because they're still not able to deduct any expenses attributable to the medical side of things.
Chris Picciurro:So they would have I'm thinking they would have a we had in our private practice, we had a client that was is he's mainly in real estate, but he was involved in a cannabis business, and he received a k one. That k one from the federal perspective was much higher, and he had a Michigan k one that that had a schedule and and did show the the they allocated the deductions, and so his Michigan income was taxable income was less. Interestingly enough, the state of Michigan never got that information. So we we prepared the return properly. He ended up getting a letter from the state of Michigan.
Chris Picciurro:Some reason, the state of Michigan had the federal taxable income on this transcript. So whatever.
Kareyna Miller:Yeah. The the the state of Michigan. I I ran into that with every single return I filed is I I feel Okay. I don't feel bad. Schedule, attach it with the e file, and they they must not get it because they they come back and they ask for it again.
Kareyna Miller:We've provided general ledger detail in some cases if they if they challenge the the I'm not even gonna say challenge if they they send a letter saying we need more detail. We've we've given them tens or hundreds of pages of, okay, here here it all is.
John Tripolsky:And, Karina, a question for you too as we we kinda near the end of this a little bit is, a, I am I'm, like, absolutely blown away at just the knowledge you have in that industry, but then because really it is like a subsegment of an industry where it seems like a lot of people don't when I say a lot of people, I'm taking this take it as a great assault coming from me, but at a lot of these conferences with other tax pros, it seems like a lot of them are just like, nope. Nope. I I don't deal with those. Or it's like a bank. Right?
John Tripolsky:Some of them say, oh, you do online gambling. Nope. Can't come in here. Anything like that. So my question for you is kind of we'll call it a little bit of an elephant in the room.
John Tripolsky:Right? It's an assumption that could be wrong that there's a a fair share or a percentage of individuals who've got into the industry legally and rightfully so carry licenses, file taxes, etcetera. But maybe weren't doing it that way in the past. So do you find yourself really kind of as you take on a client or onboard a client in that industry, do you find yourself really kinda, in a sense, being a little bit of a business coach and making sure that they're doing a lot of other things correctly, not just related to taxes? Because maybe they never had a mentor before.
Kareyna Miller:Earlier on, yes. Transitioning from so I I don't wanna call it I I don't wanna call it the black market. You had Michigan had Detroit, Lansing, Flint, Traverse City. There there were cities that had licensed these businesses years before the state had done it. For them, though, they were they were trying to transition from just kind of, okay.
Kareyna Miller:We've we've got our our caregiver grow. We're supplying our product to the state's model of of a licensed business. So, yeah, there there's been a lot of a lot of coaching in the sense of business deals that didn't go right, issues that that occur if if if they they thought they were gonna get a building and they didn't, or or they're having cash flow struggles, but also aren't putting inappropriate credit checks for for their customers. So so there there are a lot of things in in that perspective, advising on agreements, so how how to write agreements. They they'll pull templates offline, or they'll pay pay an attorney 1,000 for for a template.
Kareyna Miller:But how how does that agreement actually work for them in their business and and address the issues that they need to address? I've seen a lot of business deals go wrong, and I think that's where clients just need somebody to talk to sometimes and and get get things off of their trust and and express what they need to express. So, yeah, I mean, I guess the more I think about it, yeah, there there's a fair fair amount of that still happening sometimes.
Chris Picciurro:Well, I think too you've gotta assess the risk of of the client. Like, we all do. Right? It's we all do this. If we have a client coming in and potential client look.
Chris Picciurro:We wanna legally and actively reduce the tax on pays in their lifetime, but if we got someone coming in and say, I am paying the government $1. It's like, okay. Well, there's a reason you've probably been through 4 accounts in the last 4 years, and there's just a there's a whole risk assessment. Making sure you're a good fit, but you identified very early that that was one of the things you you've done a really good job of. And and I think if we're all honest about our practices, there's what a good fit is today, it's probably not a good fit 5 years ago, 6 years ago.
Chris Picciurro:So so sometimes you have some legacy clients that's a that's another show of how to make sure they either adjust with them or help help them find a better spot. I do wanna talk about one more thing because there are some potential changes. Right? The rules are the rules. We're we're that we're here at the last Q4 of 2024.
Chris Picciurro:However, there are some rule changes potentially that would move cannabis from a schedule 1 to schedule 3 substance that could greatly affect anyone in that industry. Could potentially open doors to people that are not in that industry. Because you might be listening to this saying, why are they talking about just deducting cost of goods sold? Why can't they deduct their rental and rent and wages? Can you kinda explain the a little bit of the why we're talking cost of goods sold and what could happen moving forward if if the if cannabis has moved?
Kareyna Miller:So so cannabis is a schedule 1 substance under the Federal Controlled Substances Act. There's a tax code 280 e that specifically says no deductions and credits are allowed for businesses trafficking in schedule 1 or schedule 2 substances. So there there's a current process going on right now. There's been a recommendation from the Department of Health and Human Services to deschedule cannabis to schedule 3. So from a tax perspective, the immediate effect would be 2 a d e no longer applies.
Kareyna Miller:So they would be able to take deductions and credits just like any other other business would be able to. Otherwise, beyond that, I think it's I have I have mixed feelings about it. There there's the states who have their rules and things already set up. Now if you look at something happening at the federal level, what what's gonna happen to all these markets that are already established? I I think that's a big risk for them.
Kareyna Miller:So so 280 e going away is good. Access to traditional banking and credit cards and and probably traditional lending in in that. That's a good thing. But but the issue is, okay, what happens to our current business model? Does it get better?
Kareyna Miller:Does it get worse? Do we is the federal government they say, okay. Now 2 e isn't gonna apply, but are they gonna tack on a a 10 or 20% excise tax? There's a lot of unknowns in in that respect of what's gonna happen. So they they have a a hearing scheduled.
Kareyna Miller:I I believe it's December 10th. I I might be off on that date. It's mid December as the next step in this process of evaluating whether the rescheduling is is going to happen.
Chris Picciurro:And I have well, actually, I have one more compliance. I have one more compliance question. Now that we're flipping back to that, is is is a CPA, is part of the AFS process, what are the what are the checks and balances look like from let's let's say that you are a I mean, a grower obviously makes sense, but let's say you're a retailer. What are the are there restriction as as to where they can obtain the product or their inventory? Do they have to does their do their suppliers have to also have AFSs?
Chris Picciurro:Do they have to, you know, just just thinking out loud about that process.
Kareyna Miller:Yep. So so they can only buy from they can only purchase cannabis product from other licensed businesses in the state. So every licensee in Michigan is subject to that that AFS. The state so so they went through a a change a couple years ago or it may have been a year or so ago where they brought in a new executive director to the the regulatory cannabis regulatory agency. Since then, they've been cracking down.
Kareyna Miller:So there there are still things that are happening that shouldn't be happening. Product coming in from out of state, for example, growers growing too many plant, things like that that are hurting the market because it's it's creating a an unfair advantage for for those who are doing it. So the state with this AFS process, the way it works is you submit the report, The state comes back and has the liberty to ask whatever questions they wanna ask. So it could be related to the report or it could be vaguely related, but outside of that scope. So some of the things that they're checking, if they see a payment transaction in the AFS to to a supplier, so so a processor bought flour or a retailer bought something, and they see that payment transaction in AFS, they then go look in the the state's inventory system and make sure that that transaction looks the same on both sides from their perspective.
Chris Picciurro:So the So I'm sorry. So the inventory is all tracked almost like an automobile VIN number. There there is this tracking of each piece, which could be a Yeah. A compliance. And I don't wanna call it nightmare, but it's definitely a task, we'll say.
Kareyna Miller:It's a task. They they have tags. They there are tags that are from the the inventory tracking system that get attached to the different products and plants and and all that.
John Tripolsky:And then, Karina, I know we got a we can just get a couple minutes here until we gotta kick everybody off of here. But I do have one final question. One of many, but just one. Completely unrelated to almost all the stuff we talked about. So given that you you work with a lot of clients in the cannabis industry, this has nothing to do with compliance.
John Tripolsky:This has really nothing to do with anything Chris would ever ask, but because he's professional and carries himself very well. What's, like, the craziest story you have with working with a client in this industry? You're like, oh my gosh. Why did this cloud just ask me this? I don't wanna put anything on the bus.
John Tripolsky:No. You can change names, like, will you, all the time?
Kareyna Miller:I I actually anticipated something something along these lines from our because
John Tripolsky:you knew I was
Kareyna Miller:gonna be on this. Conversation.
John Tripolsky:You know very well.
Chris Picciurro:It's actually not that bad of a question. I was expecting some
Kareyna Miller:more of a question. So so as far as a a client, the craziest thing that I have seen is he had come to me, said I wanted to be compliant. I want my book set up and everything. So I was doing doing the review of all his past records, and this was a partnership with, I wanna say, 40 or so partners in it. And they put their business code in their description on the tax return that they were cannabis retail.
Kareyna Miller:And then they blatantly did not follow 280E. So they took all their marketing expenses. They took all of their their payroll in that. The craziest thing I would say that so if we go back further and you're you you're asking about the cash earlier, so this this might be a good story. When I first started, it was all cash.
Kareyna Miller:So so nobody had bank accounts. I I actually had found a bank that would work with me and would take cash deposits. They did that for a little bit, and then I got my bank account shut down from it. So they they had shut down the business account, my personal account, because I was depositing cash from from these clients. So so, overall, that happened fairly early on.
Kareyna Miller:Since then, I I feel like everything that gets gets thrown at me isn't isn't so bad as as having to go through that mess then.
John Tripolsky:Nothing's worse than being in business and then do not having a business account.
Kareyna Miller:So Yeah. Yep. But, no, I I try to as far as onboarding and vetting clients, most of my clients take months to onboard. I'm I'm pretty pretty thorough with looking at their past returns. QuickBooks, I get in there and and look through QuickBooks and look at anything that needs to be fixed.
Kareyna Miller:My best clients, I I have taken 9 months to almost a year to to onboard, and I did did various consulting in the meantime. So I I do tend to to know who I'm who I'm having as a client before signing that engagement letter for for longer term services.
John Tripolsky:Well, that wasn't nearly as bad as I thought it was gonna be. No. So and those that are listening, maybe you're surprised it's not as bad, but I know we are we are at the end of this one. We'll we'll have to have you back at some point either on on this show, or I know we discussed having you on the teaching tax flow podcast as well. Because, again, this like many of the things we talk about here on this show specifically, it's kind of ever evolving.
John Tripolsky:Right? So there'll be new rules and regs coming through, elections coming up. Who knows what what'll go in in that direction? So it'll be interesting. So it's I mean, the I can say this wholeheartedly.
John Tripolsky:The the industry that as far as for tax professionals, but then also the cannabis industry is is very lucky to have somebody like yourself that doesn't just dabble in it. Like, this is this is what you do, and you seem extremely knowledgeable, which is why we had you on clearly because we do vet our guests. So good job. You passed the you passed the criteria.
Chris Picciurro:Most of the time.
John Tripolsky:You passed the level of where the bar is set, but then also you you're you're so passionate about it. It seems that you you wanna do this. You wanna serve these clients. You wanna work with them. Just in one of your last comments, are you taking so long to onboard them?
John Tripolsky:It's not it doesn't seem at least that anybody just comes to you said, yep. Okay. Cool. Yep. You could be a client.
John Tripolsky:Let's work together. Right? Like, it's it's really making sure that the relationship is fruitful on both sides of the fence. So we appreciate you joining us here this afternoon.
Kareyna Miller:Yeah. Absolutely. It was it was fun. I appreciate you having me.
John Tripolsky:Awesome. And that's that's code for you appreciate me for not harassing you and asking too many wild questions. So I appreciate that much.
Kareyna Miller:You you say my crazy story wasn't too bad. The the questions weren't too bad. So I I had I had some expectations of some odd things being thrown at me.
John Tripolsky:K. We'll we'll take one day, I'll share my crazy marketing stories for some random show that nobody listens to. But, anyways, well, let's go ahead and wrap this one up here. Again, thank you, Crater. Thank you, Chris, for obviously discussing this.
John Tripolsky:I'm gonna need another notepad now because this one's full of more questions to ask you about at a later date. But as always, anybody that's listening to this is a reminder from earlier on and as well as the other shows too. You do actually get a CP for listening to this. So this is gonna go out here shortly in a about a week or so, 2 weeks from recording date here, goes to the entire process. Again, it's vetted.
John Tripolsky:So it is a actual certificate or I should say an actual credible credit that you're getting. It's just not us coming up with this. The link is in the show description there at the very top. Go ahead and click on that. Directs you to earmark, and go ahead and collect that free CP as well as go back to the previous shows and do the exact same.
John Tripolsky:And we will see everybody back here again on the next episode of the mister r show.
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