Rescheduling Cannabis: How It Will Shake Up Accounting & Tax

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:

1. *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.
2. *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.
3. *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.
4. *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.
5. *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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Industry? *

The Cannabis industry needs trained accountants now more than ever, to help
them with compliance and maintaining a profitable, healthy business. We’ll
teach you how to provide CFO-level support to growing companies in one of
the fastest-growing industries in our generation.

Click here to learn more.
*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:

1. Expand their customer base exponentially
2. Take advantage of economies of scale in production
3. Specialize in products that may have national appeal but limited
local demand
4. 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:

1. *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.
2. *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.
3. *Tax Implications:* The current tax structures are based on
intrastate commerce. Interstate sales will require new frameworks for how
taxes are collected and distributed.
4. *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:

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

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

1. Understand the tax implications of selling across state lines
2. Develop systems for tracking multi-state sales and compliance
3. Evaluate opportunities for expansion or partnerships in new markets
4. 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:

1. *Substantial R&D Budgets:* Pharmaceutical giants have deep pockets
for research, potentially dwarfing current Cannabis R&D spending.
2. *Advanced Research Facilities:* Access to state-of-the-art labs and
research tools could accelerate discoveries.
3. *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:

1. *Targeted Therapies:* We might see medications developed for specific
conditions, moving beyond the current broad-spectrum approach of many
Cannabis products.
2. *New Delivery Systems:* Research could yield innovative ways to
administer cannabinoids, improving efficacy and patient experience.
3. *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.
4. *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:

1. *Consistent Dosing:* Pharmaceutical-grade products could offer more
precise and reliable dosing.
2. *Quality Assurance:* Stricter manufacturing standards could improve
product safety and consistency.
3. *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:

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

*Challenges and Considerations *

However, this shift also brings challenges:

1. Regulatory Navigation: Researchers will need to navigate FDA approval
processes, which can be lengthy and costly.
2. Balancing Act: The industry will need to balance pharmaceutical
development with the needs of existing medical Cannabis patients.
3. 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:

1. New Valuation Metrics: We'll need to consider R&D pipelines and
intellectual property in company valuations.
2. Complex Accounting: Tracking R&D expenses and capitalizing on
successful developments will become crucial.
3. Funding Strategies: We'll need to help clients navigate funding
options for costly R&D projects.
4. 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:

1. Licensing: States will likely continue to control who can grow,
process, and sell Cannabis within their borders.
2. Local Control: Many states allow municipalities to ban or restrict
Cannabis businesses, a practice that's likely to continue.
3. 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:

1. 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

2. 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

3. 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:

1. 280E Reform: With Cannabis off Schedule I, we could see the end of
280E's application to Cannabis businesses, allowing for normal business
deductions.
2. New Federal Taxes: However, don't be surprised if new federal excise
taxes are introduced, similar to those on alcohol and tobacco.
3. 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:

1. FinCEN Guidelines: Expect updated guidelines from the Financial
Crimes Enforcement Network on how banks should work with Cannabis
businesses.
2. 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:

1. Age Restrictions: Federal guidelines on age restrictions for Cannabis
purchases may be implemented.
2. Product Testing: More rigorous and standardized testing requirements
for potency, contaminants, and consistency.
3. 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:

1. Energy Use: Regulations on energy consumption for indoor growing
operations.
2. Water Usage: Guidelines on water use and runoff, especially in
drought-prone areas.
3. 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:

1. Compliance Costs: Businesses will need to invest in robust compliance
systems to navigate federal and state regulations.
2. Interstate Commerce Complexities: As discussed earlier, regulations
around interstate Cannabis commerce will add new layers of complexity.
3. Increased Need for Expertise: Cannabis businesses will rely heavily
on legal and financial professionals to navigate this new regulatory
environment.
4. 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:

1. Solid Financial Controls: Investors want to see that a company has
robust systems in place to track and manage its finances accurately.
2. Compliance with Regulations: Given the complex regulatory
environment, investors need assurance that businesses are operating within
the law.
3. Strong Governance: Clear leadership structures and decision-making
processes are crucial.
4. 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:

1. Increased Cash Flow: Without 280E, Cannabis businesses could see
their cash flow increase by 15-40%, depending on their effective tax rate
and location.
2. Higher Net Income: The ability to deduct standard business expenses
will significantly boost net income figures.
3. 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:

1. *Detailed Financial Audits:* Investors will want to see clean,
accurate financial statements that can withstand scrutiny.
2. *Compliance Checks:* Thorough reviews of all licenses, permits, and
adherence to state and local regulations.
3. *Operational Assessments:* Deep dives into business operations,
supply chains, and growth strategies.
4. *Management Team Evaluation:* Close examination of the experience and
track record of key personnel.
5. *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:

1. *Implement Robust Financial Systems:* This includes detailed
record-keeping, regular financial reporting, and strong internal controls.
2. *Maintain Impeccable Compliance:* Given the industry's regulatory
complexities, businesses must be able to demonstrate strict adherence to
all applicable laws.
3. *Develop Clear Growth Strategies:* Investors will be looking for
well-thought-out plans for scaling and expanding the business.
4. *Build Strong Management Teams:* Having experienced, credible
leadership will be crucial for attracting investment.
5. *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:

1. Help clients build and maintain those all-important perpetual data
rooms.
2. Ensure financial statements are audit-ready at all times.
3. Assist in developing financial models that can withstand investor
scrutiny.
4. Guide clients through the complexities of valuation in a post-280E
world.
5. 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.