Legalization: What’s ahead with cannabis accounting

Ballot initiatives relating to cannabis will be voted on in five states — Arizona, Mississippi, Montana, New Jersey and South Dakota — this November. Topics being considered are presented in Marijuana on the ballot

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If you are a CPA working with clients in the cannabis industry, or if you think you might in the future, you’ll want a firm grasp of the issues regarding cannabis accounting.

Cannabis? Marijuana? THC? CBD? Hemp?

Like most industries, the cannabis industry has its own vocabulary.

Cannabis and marijuana both refer to the genus of plant that produces THC and CBD. THC, short for tetrahydrocannabinol, refers to the psychoactive substance found in varying quantities in cannabis. CBD, the abbreviation of cannabidiol, produces no euphoric effect but is used for an assortment of ailments. Hemp, by legal definitionCannabis sativa L.

, refers to various parts of the 

 plant that contain no more than .3% THC by dry weight.

Legality varies

Federally, THC and CBD are Schedule 1 controlled substances — the same schedule as cocaine and heroin — defined as having no currently accepted medical use and a high potential for abuse.

However, as of this blog, 33 states have laws permitting the growth, sale, and processing of cannabis in different forms. While several states allow recreational use, some allow use for medicinal purposes only. To further confuse matters, certain states allow CBD preparations only, while others allow CBD and THC preparations for medicinal purposes. And while hemp-based CBD products are federally legal, some states still ban them.

In 2013, the U.S. Department of Justice (DOJ) issued guidance commonly known as the Cole Memorandum. While the memorandum did not legalize cannabis federally on any level, it did allow for the exercise of investigative and prosecutorial discretion in connection with marijuana businesses operating in states that have legalized its use. The Cole Memo provided a consistent nationwide federal policy on prosecution. However, the memo was rescinded in 2018. As a result, the industry is left with the prospect of enforcement policies that differ among the 93 existing U.S. Attorneys.

Banking considerations in the cannabis industry

Problematically, many banks will not open accounts for cannabis businesses. Strictly interpreted, doing so amounts to money laundering, making banks that do so technically in violation of federal law. As a result, many cannabis businesses must operate on a cash basis. This complicates the accounting issues and reporting complexity that CPAs are best positioned to address.

A taxing question

For businesses operating in states where cannabis is legal, federal income tax will need to be paid on any profits. This tax is in addition to any state income, sales or excise taxes paid.

Because of its illegality on the federal stage, cannabis is subject to Internal Revenue Code Sec. 280E restrictions that disallow deductibility of certain regular business expenses for operations trafficking in controlled substances.

Recently, the Treasury Inspector General for Tax Administration issued a report recommending relief to legal cannabis businesses under Sec. 471(c). However, to date, there is no guidance from the IRS and no available court rulings to test this strategy. As it stands, IRC Sec. 280E can result in a federal income tax burden that exceeds net profit.

Legal, taxation and banking issues make cannabis business valuation a challenge.

Being legal or illegal based on geography, licensure and permits, medical vs. recreational sales, and the lack of good metrics for comparable businesses make clear valuation difficult. One-time startup expenses can be high, necessitating careful analysis of what’s recurring and what isn’t.

To attract buyers or investors, valuation of cannabis businesses must be carefully executed and documented with evidence.

If you want to engage in this work, explore strategies and methodologies meticulously to produce the best results.

The industry is expanding.

Due to the increasing number of states legalizing cannabis in one form or another, the industry is evolving rapidly. Some estimates put the legal market for cannabis at more than $70 billion — more than corn and wheat combined — by 2027. CPAs will be needed to provide sound financial advice and support to cannabis businesses.

Regardless of your state’s current laws on cannabis, the industry is expanding quickly. If you want to provide services to cannabis businesses, you’ll want to be prepared.

To help you confidently and competently support your clients, the AICPA & CIMA Cannabis Industry Conference

 will present sessions on these and many other topics relating to accounting for cannabis. Join via livestream Dec. 7-8.

Association Staff

Posted by AICPA Communications on Oct 19, 2020 in Cannabis

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Now in Hackers’ Crosshairs: Accounting and Finance Firms

Why the escalating cybersecurity threats for finance and accounting firms? For one, you likely have sensitive customer data, in addition to key information about their employees, vendors and customers.

This has been a year unlike any other in almost every respect, and cybersecurity is no exception. Here’s why the changing threat landscape could give a scare to accounting and finance firms — and what they can do about it.

Why Hackers Have a Bead on Accounting and Finance Firms

We’ve been seeing a dramatic increase in malicious activity since the onset of COVID-19, with the FBI recently announcing that they’re fielding as many as 4,000 cybersecurity-related complaints per day, a 400 percent increase on pre-COVID-19 levels. Also new: the extent to which firms in the finance and accounting space are being targeted. Just ask Canadian firm MNP, for example. A ransomware attack crippled the firm last spring, forcing it to cease operating for an entire week. Coming on top of broad-based pandemic-related disruption, that’s way too much time for any business to be offline.

Why the escalating cybersecurity threats for finance and accounting firms? For one, you likely have sensitive customer data, in addition to key information about their employees, vendors and customers. In the eyes of a malicious actor, that looks like a “master-key” that could unlock many doors.

Keep in mind, smaller organizations of all kinds, from hardware stores to hospitals, are being targeted. Wherever less-evolved IT security practices and sensitive data come together, hackers are on notice. And with good reason, too — in 40 percent of ransomware attacks, after all, the victims ultimately pay the ransom.

The High Cost of Inaction

It’s hard to overestimate the potential negative impacts of cybersecurity threats downstream. Losing sensitive financial records, tax documentation and more to malicious actors is going to cost you clients, of course, but the true costs cut deeper. For example, research shows that for companies with unfavorable reputations, hiring and retaining talent comes with an estimated $7.6 million in additional financial outlays annually.

To better protect your business — and your clients’ data — a few simple best practices can go a long way:

• Educate your teams: Given that “lack of cybersecurity training” is consistently cited as among the leading causes of successful ransomware attacks, educating staff members is a key first step toward thwarting malicious actors.
• Conduct risk assessments: Regularly auditing the client information your firm collects and stores is especially critical if you’re considering making any changes, which could open new loopholes for cyber risks.
• Send for backup: Retaining several different generations of backups should be sufficient to ensure business continuity in case of a breach: say, one backup for each week of the month, extending back in time for one year. Just make sure these backups are physically removed from your network — otherwise, in the event of a malware infection, your backup could be compromised.

Finally, I recommend checking out these case studies to see how digitally advanced partners can help your organization adopt best-in-class IT practices, evolve your tech infrastructure and generally stay a step ahead.

Next Steps for Accounting and Finance Firms

The good news is that organizations across the board right now are spending slightly more than one tenth of their IT budgets on cybersecurity, a strong indicator that safeguarding digital infrastructure is emerging as an increasingly clear business priority. All told, in fact, net spending in this area has increased by more than 23 percent since 2017. That’s certainly an encouraging trend.

But forward-thinking, cyber-resilient accounting and finance practices must follow suit in the near term, too. Evolving your capabilities, building more advanced infrastructure, better educating teams — think of these as essential next steps in order to more effectively inoculate yourself against threats in our ever-changing cyber-risk landscape.

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Greg Dyer leads Randstad’s inhouse services concept and enterprise strategic accounts team, where he is responsible for strategic commercial sales, client delivery and account management for many of Randstad’s largest clients. Greg oversees a team of strategic account directors and inhouse leaders and has a proven track record of establishing solid go-to-market strategies, setting and communicating clear vision and goals and delivering outstanding results. Under Greg’s leadership, Randstad has significantly improved strategic delivery and fulfillment in many client staffing programs.

Greg Dyer

Nov 2nd, 2020

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From the November 2020 Issue.

“If you say it really fast, it sounds easy.” I smile when I think about this phrase because I know where I learned it and why. It pairs up with another favorite saying of mine, “the difference between a professional and an amateur is knowledge of, and practice of, the little things.” Within the past week, I learned a quote that is useful for this column on hosting. “Amateurs practice until they get it right; professionals practice until they can’t get it wrong.” One last phrase that applies, “An amateur can be satisfied with knowing a fact; a professional must know the reason why.”

I have the utmost respect for teams that make data centers and hosting facilities work. The less you know about the mechanics of making a large-scale application or hosting facility work, the easier it sounds. However, creating an environment that can run 24x7x365 with 99.9999% reliability is almost impossible. It takes a team of dedicated engineers to make things work reliability, responsively, and securely.

Yet we expect that our applications or apps simply run all the time. During the last half of this year alone, we’ve seen outages from Microsoft, Wolters Kluwer, Intuit, and many other applications that are critical for our profession. Are they only ones? Certainly not! If we look back two years, the list becomes onerous. Check out https://downdetector.com/archive/, and you quickly see many services fail every day. You can specifically look by service or vendor, and it doesn’t take you long to realize that cable communications providers frequently have outages or performance issues, which would make it appear as if an application or hosting provider has failed.

So, What Should Be Our Expectation?

Simply put, it doesn’t matter how well a vendor has built a service; there will be failures. In an ideal world, most outages or scheduled downtime would occur at a time of day when the service was not needed. For example, an outage in the middle of the night or over the weekend may not affect you because you are asleep or enjoying some recreational time off. But if you have tax deadlines, filing deadlines with regulatory agencies, public reporting, or various other time-constrained activities, not being able to work matters.

As we have explained in previous columns, you can build your own private cloud on your own premises with hardware servers, storage area networks, solid-state drives, virtual machines with VMWare or Hyper-V, adding remote access with RDS, Citrix Virtual Apps, and Desktops or Horizon View. By the time you add backup appliances, multi-factor authentication, and mobile device management, you have a lot of moving parts that all must be understood. You must be aware of security with firewalls, anti-virus, intrusion detection, switching, and more. You have capital costs and replacement costs. You have to have the expertise with either internal IT or external IT contractors that provide managed services like Network Management Group, Inc. The IT teams that support you must understand the public practice profession and applications or industry you are in, such as non-profit, healthcare, manufacturing, construction, or distribution. From 1983 through 2014, these systems were straight forward enough that a good IT person could wrap their head around most complexities. I don’t believe that is true today.

As technology changes accelerated starting in 2008, it became more difficult for IT teams to keep up with all the changes in infrastructure as well as with the applications. A single IT person faced a real challenge. Further, as risk mitigation, firms were often dependent on the quality of a relatively small team. However, a private cloud deployment could provide the fastest, least-cost solution for less than 250 people, including many CPA firms. Plus, when a private cloud works correctly, it is a beautiful thing. You have the ultimate control for speed, when you choose to spend on technology, and application options. Unfortunately, if you don’t have the right combination of hardware, infrastructure software, and knowledge of applications, the solution may never work quite right. That’s where a good IT team or managed service provider comes into play.

Another risk to mitigate was the physical risk caused by large-scale storms, including hurricanes and tornados, and other physical risks like fire, theft, or ransomware attacks. We could work around some of these issues by placing our equipment in a co-location facility, a specialized data center that allows us to put our own equipment in secured spaces. Most providers to the profession use co-location facilities because it is expensive to build and maintain a large-scale data center. But even with a co-location facility, you need to have a replica in another location in the country which uses a different power grid. There are three power grids in the U.S., the east grid, the west grid, and the Texas grid. I’ve had the privilege of building and touring many data centers throughout the country. There is much variance in the quality of co-location facilities, and the reported number varies. For an example list of these facilities, consider https://www.datacentermap.com/usa/. Managing co-location facilities adds another layer of complexity.

Enter the Hosting Companies

Entrepreneurs saw the opportunity to provide CPA firms as well as other industries such as healthcare, legal, or property management specific hosting customized to their professions. Often, the entrepreneurs did not understand the complexity of the infrastructure they would be responsible for. There was also a lack of understanding of the criticality of deadlines. Worst of all was the complexity and poor design of the applications built to serve the profession, which turned out to be horrible at scale. The deficiencies were largely covered up with a local area network or private cloud installation. The entrepreneur’s idea was to build a monthly recurring revenue business charging customers (CPA firms in your case) $150-300 per month per user. While I won’t tell the history of all who tried to compete, a few have risen to the top. The hosting value proposition was attractive to partners who simply wanted IT to work so they could focus on accounting and outsource IT. However, most hosting vendors presented other limitations on applications they could support, making things work at acceptable speeds or for users who didn’t have internet access like auditors.

Further, the software publishers themselves have offered hosting services, such as Thomson Reuters Virtual Office CS or their own SaaS applications like GoFileRoom or GoSystem RS. Drake ran their own hosting operation for some time and has recently contracted Right Networks to run their applications. At the same time, we hope that more applications can run efficiently in a browser and as a SaaS offering. This vision from 1993 has just started to become a reality in the last five years. New generation products like Thomson Reuter’s ONVIO will run in a browser. Wolters Kluwer made a design decision to use a thick client instead of a browser for performance reasons, and today runs all of CCH Axcess in Microsoft Azure data centers. I can’t wait for an all SaaS world, but who knows when this will arrive!

If we focus on today, internet speeds are greater, available in more places, and in general, are more reliable. Reliable internet has made hosting with private cloud, hosting, or using public cloud facilities like Microsoft Azure or Amazon Web Services more viable. These providers have specific hosting efforts for CPA firms:

• CETROM
• Right Networks
• Ace Cloud Hosting
• AbacusNext
• Cloudnine REALTIME
• Summit Hosting (who purchased InSynq, the original hosting company)
• Swizznet
• IVDesk
• Cloudvara
• Realtime Data Services
• NetGain
• NetTek
• Forum Info-Tech IT
• Skyline Cloud Services (formerly Uni-Data)
• Cloudwalks
• Noobeh
• List of Intuit-Authorized Commercial Hosting companies

Note that costs and quality vary widely between these providers. Firms report to us confidentially and regularly on their experience with all these providers. The most favorable reports are on CETROM, Right Networks, and Ace Cloud. I have also received complaints about every hosting company listed this year and typically refer the issue to their management teams for resolution. On these bad reports, I follow the Grandma rule: “if you don’t have something nice to say, don’t say anything at all.” While this column is not intended to serve as a review, I’ve listed the better options closer to the top, and the QuickBooks Desktop-only hosting companies are closer to the bottom. Note the last link provides a list of authorized QuickBooks desktop hosting companies. Our recommendation for CPA firms is to only consider companies that are authorized QuickBooks hosting companies as your CPA firm hosting company.

Does Anyone Get It Right All the Time?

The short answer is no. IT is difficult. Hosting is harder. Security is becoming more difficult. Integrating Microsoft 365 and Adobe cause changes beyond your IT team or hosting company’s control. The days of simple IT for a small firm are gone. SaaS is not the answer yet but may be within the next five years.

What should we do today? Choose a private cloud strategy if you want greater performance and control. Carefully select your IT contractor or managed service provider to supplement your internal or local IT company. Alternatively, you can choose a hosting company, but you need to be prepared for problems that may be hard to resolve or never resolved. There will also be things outside of your control, like performance and outages. You need to have a plan on how to work when your IT is not working. In other words, what is your plan to work manually? Don’t put things off to the last minute because your IT may not work that day. Perhaps being able to work on a local machine still has merit. On the other hand, keeping data on local drives affects retention policies and presents a whole new level of risk with security breaches.

Will things get better? Yes. But not before they get worse, as illustrated by the Microsoft outages of September and October. Nevertheless, we were impressed by how Microsoft scaled in March and April to support the COVID-19 pandemic stay at home orders. CPA firm publishers will get there. Hosting companies will learn how to cope with the new hybrid model of multiple clouds. In the meantime, if you are running a private cloud, that may be your safest, least-cost option. If our software providers run all the applications as SaaS and Microsoft 365 is integrated, it will just be a matter of time before our legacy apps are finally browser-enabled. Can you say that really fast?

https://www.cpapracticeadvisor.com/firm-management/article/21157787/does-your-firm-have-a-clear-vision-for-hosting-public-cloud-private-cloud-saas

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2021 Social Security wage base announced

By Sally P. Schreiber, J.D.

October 14, 2020

The Social Security Administration (SSA) announced

 that the maximum amount of wages subject to the old age, survivors, and disability insurance (OASDI) tax will increase to $142,800 in 2021 from $137,700 in 2020. The OASDI tax rate is 6.2%, so an employee with wages up to or above the maximum in 2021 will pay $8,853.60 in tax, with the employer paying an equal amount. Self-employed individuals pay tax at a 12.4% rate up to the limit, for a $17,707.20 maximum amount of OASDI tax.

The Medicare hospital insurance tax of 1.45% each for employees and employers, or 2.9% for the self-employed, has no wage limit.

The SSA also announced that recipients of Social Security benefits will receive a 1.3% cost-of-living adjustment and that the earnings test for the amount of income that benefit recipients can receive without having their benefits reduced each year is $18,960 before full retirement age, and the limit taxpayers can earn in the year they reach full retirement age is $50,520, both increased from 2020.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a senior editor.https://www.journalofaccountancy.com/news/2020/oct/social-security-wage-base-2021.html

JofA 

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CLAIMS HANDLING APPROACH

In spite of a CPA’s best intentions, there is always the potential for an error, omission, or client disappointment. CAMICO policyholders work directly with in-house claims specialists who have many years of experience in handling accountants’ professional liability insurance claims. CAMICO follows three basic steps when handling claims:

1. PHILOSOPHY

Disputes can impact a firm’s income, assets and reputation. CAMICO’s sole focus on the CPA profession delivers exacting counsel throughout the claims handling process, so claims are resolved efficiently and effectively. When helping policyholders, our in-house, claims specialists view every situation as an opportunity to demonstrate:

1. CAMICO’s expert approach to the claims process, specifically for CPAs (Accountants)
2. Our personalized approach to helping policyholders with their specific situation and needs

2. EARLY INTERVENTION

At CAMICO, we are dedicated to preserving a CPA firm’s reputation with a proactive approach to claims handling. CAMICO’s experience shows that early intervention can minimize potential damages before they escalate. That’s why we assist with potential claim matters on your behalf and at our own expense. We even provide incentives to encourage early reporting of a problem:

1. Potential claims expenses such as attorneys’ fees are not charged against the deductible or policy limit
2. Deductibles are reduced by 50% (up to $50,000) for early reporting of a potential claim during the policy period in which it becomes known, or use of formal mediation to attempt to resolve a claim

3. A FOCUSED AND ACTIVE DEFENSE: CLAIMS EXPERTISE

Claims situations can be extremely stressful. With your practice and reputation at stake, it is easy to imagine the worst. In the event that a matter turns into a claim, CAMICO is with you every step of the way. Our claims specialists apply upfront analysis to develop and implement a strategy to resolve the matter in a focused manner. To achieve best results, our proactive approach includes assembling, when warranted, a team of experienced lawyers, experts, and consultants and includes a strong emphasis on risk management.

Interested in a quote?

CAMICO has a streamlined and user-friendly online application process for CPA firms with up to 3 CPA professionals. Receive an insurance quote in less than 5 minutes!

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No-Cost In-House Expertise

Utilize our in-house specialists who have an average of 16 years of experience in risk management and average of over 20 years of experience in public and private practice per individual. CPAs can call a General Loss Prevention hotline as well as specialized hotlines focused on the following areas:

1. Tax
2. Accounting & Auditing
3. Subpoena and Consultation Services

General Loss Prevention Hotline

• CAMICO® gives policyholders direct access to professional advisors who deal exclusively with the concerns and issues facing CPAs. Our in-house specialists are available to help policyholders with a wide range of general risk management topics, including: arbitration/mediation, conflict of interest, client screening, documentation, engagement and disengagement letters, billing and collections, fraud, and internal control.

1. Tax Advice Hotline Services & Expertise
• Over 50 percent of the claims CAMICO sees are tax-related, and CAMICO has determined that certain tax areas present greater liability risks. Our In-house, tax specialists are experienced in tax matters and provide technical advice related to complex estate, gift, and corporate income tax issues. They will discuss applicable Internal Revenue Code sections, revenue rulings, cases, and other tax research materials that can serve as a springboard for further research by your firm.
2. Accounting & Auditing Advice Hotline Services
• Your firm will have access to in-house specialists who know audit services and processes. They provide guidance regarding a variety of accounting and auditing issues, including Statements on Auditing Standards, Statements on Standards for Accounting and Review Services, going concern issues, Code of Professional Conduct and ethics, independence, conflicts of interest, and quality control standards.
3. Subpoena and Consultation Services
• CAMICO’s team of highly experienced in-house specialists are available to assist with subpoenas and third-party requests for information. These services are designed to assist policyholders in reducing the risk of claims and litigation and to guide them through the subpoena process when they are not a party in the litigation. When warranted, this may include legal counsel to assist policyholders with services such as responding to civil, criminal, or grand jury subpoenas, and regulatory requests.

Take advantage of these services. Become a CAMICO policyholder by going to https://member.camico.com/getaquote/

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