Accountants are, by temperament and training, ethical people. Being able to demonstrate a clear understanding of where the line is between ethical and unethical behavior goes with the job, and clients want to have confidence that their professional advisers have the knowledge and judgment to help them stay on the right side of that line. Unsurprisingly, then, many accountants are uncomfortable or uncertain about providing services related to the cannabis industry. Since many industry business operations are clearly illegal under federal law and are illegal or have an ambiguous legal status in many states, the subject no doubt leaves many accountants feeling ethically adrift (at least with respect to the lack of established, acceptable standards of practice).
Doubtless, many practitioners will choose not to engage with clients who are involved directly with the cannabis industry. Their reasoning is understandable; there is risk, uncertainty, and a potential social or professional stigma for those working with clients who sell marijuana. However, practitioners should be aware that even if they do not want to work directly with new cannabis industry clients, some of their existing clients may not have the same hesitancy, and this can present the practitioner with the same ethical concerns that would be encountered with a new client. Consider the following:
Example 1: A longtime client has had his commercial warehouse sit vacant for an extended period. One morning, the practitioner gets a call from the client saying that he has found a long-term tenant that is willing to pay above-market rent and one year in advance. The only catch is the tenant wants to grow and process cannabis in the warehouse. The client wants to know the tax consequences of the transaction, along with the practitioner's other pertinent thoughts.
Example 2: A business client sells and installs heating, ventilation, and air conditioning (HVAC) systems. The company has been one of the practitioner's best clients, requiring annual review, tax, and consulting engagements for many years. The company has been increasing its net profits and expanding for the last several years. During a recent meeting with the practitioner, the company's owners mentioned that 35% of its growth has been due to cannabis industry clients requiring HVAC systems in their warehouses. The owners would like the practitioner's firm to change the company's review engagement to an audit so it can get additional funding from its bank to expand.
Example 3: The practitioner is referred a new client by a longtime, valued client. The potential client would like to engage the practitioner's firm to assist with the merger and acquisition of a competitor. The potential new client's owners disclose to the practitioner that the target company is a major supplier to several cannabis industry customers.
As the examples above illustrate, it is not impractical to think that many practitioners will have indirect dealings with the cannabis industry, if not working directly with a cannabis industry client. Cannabis-related clients will not be the right choice for every practitioner; however, every practitioner should be prepared for clients to be affected by the cannabis industry in some way. Therefore, practitioners should take steps to gain sufficient knowledge about the cannabis industry so they can be prepared to answer questions from clients considering getting involved with the industry.
At first impression, understanding the cannabis industry may seem an overwhelming challenge for practitioners, but it is not much different from learning about any unfamiliar industry. The cannabis industry is large, growing, and has many moving parts, but practitioners should consider that the accounting profession is not the only group of professionals attempting to figure out how to handle it. Bankers, attorneys, insurance brokers, wealth managers, and other professionals are facing the same challenge. A practitioner seeking to understand the cannabis industry should consider reaching out to these other professionals to gain and share knowledge. Consider reaching out to the following professionals and asking these types of questions:
- Bankers: Could a client's building be put at risk if it leased to a tenant associated with the cannabis industry? Could having a significant percentage of cannabis-related clients affect a client's ability to obtain financing or other banking services?
- Attorneys: If a client performs significant services for a cannabis-related client, might it be considered by the federal government to have aided and abetted a criminal enterprise? If a company has third-party investors, could the company's managers be putting them at risk by engaging with clients who are associated directly with the cannabis industry?
- Insurance agents: Could a client's insurance coverage be considered void if the client works directly with cannabis-related customers? Could a client's future insurance premiums increase if it has a significant share of cannabis-related customers?
- Wealth managers: Could a client'sinvestment options be limited if its increased ability to invest is a result of working with cannabis-related clients? Are there any unique investment opportunities for clients interested in working with the cannabis industry?
By reaching out to professionals in other industries, the practitioner will gain knowledge well outside the realm of accounting. This could be of significant value to clients that are dealing with or considering dealing with the cannabis industry. However, practitioners also should be prepared to answer questions directly related to the taxation of the cannabis industry.
Probably, the most prominent consideration is the Sec. 280E disallowance of deductions or credits related to trafficking in controlled substances, which under federal law generally include cannabis:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
While the practitioner might not be involved directly with clients that are trafficking in controlled substances including cannabis, case law may assist practitioners in understanding what will prevent clients from being considered as carrying on a trade or business of trafficking in controlled substances. A client that is not selling cannabis directly will not want to fall under Sec. 280E, but would having a highly saturated client base of cannabis clients risk putting the client under Sec. 280E? A practitioner with clients who deal with the cannabis industry should stay current with case law to make sure they do not. Consider studying the following Tax Court cases:
- Californians Helping to Alleviate Medical Problems Inc., 128 T.C. 173 (2007): The Tax Court found that a taxpayer's provision of medical marijuana to its members was subject to Sec. 280E, although its provision of "caregiving services" to the same members was a separate business activity not subject to Sec. 280E.
- Olive, 139 T.C. 19 (2012): The Tax Court found that facts and circumstances established that the taxpayer's dispensing of medical marijuana and its provision of services and activities were a single business activity subject to Sec. 280E.
A practitioner also should be aware that the cannabis industry is subject to a high risk of tax examination. Would a client's working directly with a cannabis customer lead to an examination? No one can definitively answer that question, but it would be safe to say it does not make one less likely. Therefore, a practitioner with clients working directly with the cannabis industry should consider performing extra due diligence when working with the client. Examples of such due diligence are:
- Asking extra questions before starting any new engagements.
• Did the client barter?
• How did the client accept payment?
• How did the client track and deposit the payment?
• What percentage of the client's customers are directly related to the cannabis industry?
• Did the client perform any unusual services or transactions with a customer directly related to the cannabis industry?
- Reviewing the IRS Cash Intensive Businesses Audit Techniques Guide (available at www.irs.gov and adjusting workpapers to reconcile any areas the IRS may scrutinize closely.
- Requesting additional documents, such as a complete year of bank statements and project listings by client to have for your client's records in case of an examination.
Lastly, practitioners should consider reviewing their firms' internal policies and consider the following before working with clients that are working directly with cannabis clients:
- Having engagement letters reviewed by insurance carriers and legal counsel.
- Discussing with other firm members their comfort level with the cannabis industry.
- Setting the parameters requiring the firm to disengage from a client.
- Identifying the specific engagements the firm is willing to perform for the client.
- Discussing with the firm's insurance carrier whether any type of engagements will not be covered by their policy.
- Reviewing the state board of accountancy's policies for working with the cannabis industry, if any.
Practitioners are divided on the type of engagements they are willing to perform within the cannabis industry. There is no one correct answer, but rather one that each firm should arrive at for its unique circumstances. However, all practitioners should be aware that existing clients may do business with cannabis industry customers. Therefore, practitioners should take steps to prepare for their clients' dealings with the industry.
|Michael V. Ohanesian is a tax manager with Parr & Associates in San Antonio. Michael W. Crisler is a member and the chief manager of Crisler CPA PLLC in Hendersonville, Tenn. Mr. Crisler is the immediate past chair and Mr. Ohanesian is a member of the AICPA Tax Practice Management Committee. For more information about this column, contact firstname.lastname@example.org.