By Deborah K. Rood at Journal of Accountancy on May 1, 2019
Legalized cannabis is one of the fastest growing industries in the United States. Every year, additional states legalize marijuana for medical and/or recreational purposes. At the federal level, several draft bills would continue the trend toward legalization.
With the growing acceptance of cannabis as a legitimate business industry, it is no wonder this budding new practice area has many CPA firms seeing green.
Why is cannabis different?
At the federal level, cannabis is classified as a Schedule I controlled substance, making it illegal under the Controlled Substances Act (21 U.S.C. §§812(b)(1) and 812(c), Schedule I(c)(10)). However, a growing number of states permit its use for medical and/or recreational purposes. This dichotomy creates complexities other businesses do not face, which, in turn, create additional risk to CPAs providing services to cannabis businesses. For example:
- Federally insured banks may not accept deposits from federally illegal enterprises because of potential money-laundering or aiding-and-abetting charges. As a result, cannabis clients deal primarily in cash, increasing the risk of both unreported revenue and defalcation, which increases a CPA's professional liability risk, irrespective of the service provided to the business.
- Cannabis businesses may have limited access to the U.S. judicial system, including the bankruptcy process. Cannabis businesses face high operating costs, and many struggle financially or fail. While state courts may be accessible, the client's ability to discharge or restructure debt is limited. Investors and vendors who lose money in a cannabis venture may seek recovery against the firm.
- The Sec. 7525 tax preparer-client privilege may not apply to cannabis clients. If the client is under investigation, the CPA may be placed in the awkward position of being required to testify against that client.