• Expanding through contract manufacturing opens opportunities for your cannabis or hemp brand — but also brings complex financial and regulatory challenges.

• Stay ahead of tax risks by aligning your operations with both federal and state compliance rules.

• Strengthen your contracts and tracking systems to keep royalty payments accurate and transparent.

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Contract manufacturing arrangements can accelerate brand growth for cannabis and hemp companies, but they present complex tax, accounting, and compliance challenges. To protect financial integrity and valuation, companies must:

• Recognize and present revenue in a manner consistent with accounting standards and investor expectations. 

• Structure operations to preserve favorable tax status — especially for cannabis intellectual property (IP) entities avoiding Internal Revenue Code (IRC) §280E. 

• Monitor multi-jurisdictional tax nexus triggered by licensing activity. 

• Implement clear, enforceable, and regularly reconciled royalty calculation methods.

1. Revenue Recognition and Financial Presentation

Accounting Considerations

In contract manufacturing models, brand owners typically license IP to local manufacturers, who produce and distribute products under the brand name in exchange for royalty payments. Under U.S. generally accepted accounting principles (GAAP), this licensing arrangement should be accounted for as royalty income — distinct from product sales revenue recorded by manufacturers.

• Licensed operators: Recognize product sales with corresponding inventory and cost of goods sold (COGS).

• IP companies: Recognize only royalty income, without inventory or COGS.

For both cannabis and hemp operators, proper classification ensures financial statements reflect contractual entitlements — not hypothetical retail values — which can withstand both audit and investor due diligence.

Investor and Valuation Impact

Royalty-based models often report lower top-line revenue than direct sales, potentially influencing valuation multiples in capital raises. Your company can mitigate this perception by:

• Presenting retail market performance data as supplemental (non-GAAP) information.

• Demonstrating brand market share, pricing strength, and geographic expansion.

• Maintaining accounting integrity by ensuring GAAP statements reconcile with contractual royalty terms.

Sophisticated investors prioritize accuracy and contractual consistency over inflated revenue optics.

2. Tax Positioning and Regulatory Compliance

Cannabis: Preserving Non-280E Status

Cannabis IP holding companies that do not sell THC products directly and operate as an independent trade or business are generally not subject to IRC §280E and enjoy a significantly lower federal tax burden than state-licensed cannabis operators. However, maintaining this advantage depends on operational alignment between a company’s tax position and accounting presentation.

• Revenue must be recorded as royalty income, not product sales.

• General ledger (GL) accounts and financial statement categories must reflect licensing activity, not manufacturing operations.

Misalignment — such as recording product sales revenue while claiming 280E exemption — can trigger IRS scrutiny.

Hemp: Avoiding Misclassification

While hemp companies are generally outside §280E due to the 2018 Farm Bill, misclassification of revenue streams can still lead to incorrect tax filings, higher tax liabilities, or state compliance issues.

Proactive Compliance Measures

• Regular review of GL account descriptions and revenue categories.

• Documentation that ties reported revenue directly to licensing contracts.

• Periodic confirmation that financial presentation supports intended tax treatment.

For cannabis brands, this is critical to preserving 280E protection; for hemp, it safeguards proper business classification and tax outcomes.

3. State Tax Nexus and Multi-Jurisdictional Compliance

Income Tax Nexus

Licensing IP can create state income tax nexus without physical presence. States differ in sourcing rules — some focus on where products are consumed, others on where IP is exploited. Cannabis companies must navigate cannabis-specific rules layered over general sourcing provisions, while hemp companies contend with varied CBD/hemp regulations.

Sales Tax Considerations

Licensing arrangements may create sales tax obligations or require exemption certificate documentation. Hemp brands selling directly to consumers are typically subject to standard sales tax rules in each state.

Risk Mitigation

• Conduct nexus analysis regularly across all jurisdictions where products are sold.

• File returns in nexus states even if no tax is due.

• Document exemptions and monitor legislative changes.

Factor in marketing, contractor activity, and promotional events in nexus determinations.

4. Royalty Calculation and Documentation

Common Dispute Areas

Royalty disagreements often arise over:

• Gross versus net sales bases.

• Treatment of COGS, taxes, and regulatory fees.

• Allocation of shared costs (utilities, equipment, marketing).

• Returns, discounts, and promotional allowances.

Industry-Specific Nuances

• Cannabis: Must incorporate jurisdiction-specific excise taxes and licensing fees into formulas.

• Hemp: May face cost allocation issues related to compliance testing and certification.

Best Practices

• Include pro forma royalty calculations in contracts, tested with realistic production and pricing scenarios.

• Obtain written acknowledgment of the agreed methodology.

• Specify all potential chargebacks, shared costs, and allocation rules.

• Maintain separate royalty tracking systems.

• Perform periodic reconciliations between contractual formulas and actual payments to identify discrepancies early — an emerging industry best practice.

• Consider independent accounting reviews to validate partner-reported figures.

• If the manufacturer and the IP company are related parties, contracts should be reviewed in relation to tax transfer pricing rules that require arm’s length and market rate terms.

Position Your Brand for Contract Manufacturing Success

Contract manufacturing can offer compelling growth opportunities for your cannabis or hemp brand. The key to sustainable success lies in disciplined revenue presentation, strong tax positioning, proactive compliance, and robust royalty oversight.

By aligning accounting standards with tax objectives, maintaining transparent investor communications, and reconciling royalties regularly, your company can position itself to expand with confidence while minimizing regulatory and financial risk.

How MGO Can Help

We help cannabis companies across the U.S. to navigate complex accounting and tax challenges — including contract manufacturing arrangements. Whether you’re structuring royalty agreements, managing state tax compliance, or preparing for a potential audit, our dedicated Cannabis practice can help you grow smarter. Reach out to our team today to learn how we can support your goals.

The post 4 Critical Tax and Accounting Considerations for Cannabis and Hemp Contract Manufacturing Arrangements appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Tribes can diversify beyond gaming by investing in sectors like healthcare, real estate, and renewable energy.

• Federal funding programs like the American Rescue Plan Act and the Infrastructure Investment and Jobs Act offer Tribal enterprises capital for broadband, infrastructure, and economic development.

• Strategic partnerships and sovereign tax advantages help attract private investment and foster long-term economic resilience.

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If you help lead a Tribal enterprise, you already know the strength that comes with sovereignty. That legal and cultural independence gives you control few other governments or businesses have. And for many Tribes, gaming has been the foundation for economic success and community development.

But now, you’re facing a new kind of challenge — and opportunity.

With market pressures, increased competition, and shifts in federal policy, Tribes across the country are asking the same question: What comes next? The good news is, you have options — and powerful tools at your disposal to build something bigger.

From Reliance to Resilience

Gaming is still a vital part of your economic engine, but overreliance on it comes with risks. Policy changes, consumer trends, and broader economic disruptions can quickly shift the landscape. Many Tribal nations are actively exploring ways to reduce that vulnerability by creating more balanced portfolios — diversifying not just revenue, but also job opportunities, services, and long-term community value.

This pivot isn’t about abandoning gaming; it’s about using its strength to fuel what comes next. Whether you’re considering expansion into renewable energy, healthcare, or real estate, now is the time to act.

Using Federal Funds to Fuel New Growth

Over the last several years, federal legislation like the American Rescue Plan Act, CARES Act, and the Infrastructure Investment and Jobs Act have opened the door to unprecedented capital. These programs aren’t just about short-term relief — they’re about long-term investment.

For your enterprise, this funding can help fill critical infrastructure gaps: broadband, water systems, transportation, and housing. These are the foundational pieces that make economic expansion possible. But more than that, they can accelerate the launch of new ventures — if you have a clear strategy in place.

Where You Can Grow: High-Impact Sectors for Your Enterprise

As your Tribal enterprise looks beyond gaming, the question becomes not just why diversify but where to begin. The strongest opportunities are those that reflect your community’s values and build on your strengths — your land, your people, and your sovereignty.

Across Indian Country, Tribes are turning vision into action by investing in sectors that not only generate revenue but also promote resilience and self-sufficiency.

Energy is one such area. Projects in solar, wind, and hydroelectric power are gaining momentum. These aren’t just revenue generators — they are energy independence and environmental stewardship. With many federal grants aimed at clean energy transition, Tribal nations are well positioned to lead in this space while reinforcing sovereignty.

Real estate and hospitality are also seeing growth, especially where Tribal land is strategically found near tourism or transit corridors. Some Tribes are building hotels, resorts, or mixed-use developments; others are investing in warehousing and logistics to serve growing e-commerce and supply chain demands.

Healthcare and wellness initiatives are another promising path. From Tribal-run clinics to elder care and behavioral health centers, these ventures meet urgent needs while offering steady, often federally supported revenue streams. They’re also creating career paths in health services for Tribal members.

Agriculture is evolving, too. Forward-thinking Tribes are embracing aquaponics, hemp cultivation, and other sustainable farming models that promote food security and align with traditional stewardship values. These ventures often integrate well with youth programs and education efforts, deepening community impact.

And, increasingly, strategic partnerships are unlocking new potential. Joint ventures with private-sector companies — when structured with care — can bring capital while protecting Tribal interests. These partnerships work best when you set the terms, using your sovereignty and tax advantages to create win-win outcomes.

These aren’t theoretical ideas. They’re real, working examples of how Tribal enterprises across the country are reclaiming control over their economic futures.

Preparing for What Comes Next

Of course, diversification doesn’t happen overnight. It requires planning, ability building, and a willingness to grow from within. That may mean developing a stronger governance structure, modernizing financial systems, or building a local workforce that’s trained for emerging industries.

You may also face external headwinds — regulatory uncertainty, rising interest rates, environmental risks — but a thoughtful, data-informed strategy helps you navigate those with confidence. Tribal enterprises that take the time to build that foundation now will be the ones best positioned for long-term success.

The Path Forward

The moment we’re in is rare. Your enterprise has sovereign control, a supportive federal policy environment, and an economic base to build from. But most importantly, you have a mission — one that ties your business strategy to community well-being, self-determination, and generational prosperity.

At MGO, we believe in that mission. We’ve worked alongside Tribal nations for decades, helping them navigate funding opportunities, launch new ventures, and build financial systems that support sustainable growth. If you’re looking to expand beyond gaming, diversify your portfolio, or modernize your operations, we’re ready to help.

Let’s Move Forward Together

We can help you make sense of the landscape, evaluate your options, and align your enterprise goals with community priorities. Let’s work together to turn this moment into momentum.

👉 Explore how MGO helps Tribal nations grow and thrive

The post How Your Tribal Enterprise Can Grow Beyond Gaming appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses.
• The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.
• To claim it, you must make a “tentative credit reservation.”
• Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety.

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While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return. 

Who Qualifies for the HRCTC 

To be eligible, you would need to meet three basic requirements.

Which Expenditures Qualify for the HRCTC 

There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses. 

Wages for Full-Time Employees

Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment. 

In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.  

Safety-Related Equipment, Training, and Services 

Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria: 

• Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers. 
• Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.) 

Workforce Development and Safety  

Qualified training for your employees includes: 

• Joint labor management training programs 
• Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).   

Available Credit

The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million. 

To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.

How Do I Make a Tentative Credit Reservation — and When?  

You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.  

How We Can Help

The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry. 

Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save. 

The post New Tax Credit for California Cannabis Small Businesses appeared first on MGO CPA | Tax, Audit, and Consulting Services.

In the cannabis and hemp industries, capturing the true value of real estate holdings in an M&A deal can be both elusive and central to the overall success of the transaction. Difficult-to-acquire licenses and permits are essential for operating, which often drives up the “ticket price” of property, ignoring operational and market realities that suppress value in the long run. On the flip side, real estate holdings are sometimes considered “throw-ins” during a large M&A deal. These properties can hold risks and exposures, or, in many cases, are under-utilized and present an opportunity to uncover hidden value.

Both Acquirers and Target companies must take specific steps toward understanding the varied layers of risk and opportunity presented by real estate holdings. In the following, we will address some common scenarios and provide guidance on the best way to ensure fair value throughout an M&A deal.

Real Estate as a Starting Point for Enterprise Value

Leaders of cannabis and hemp enterprises must understand that real estate should be a focus of the M&A process from the very beginning. All too often, c-suite executives are well-acquainted with detailed financial analyses for other parts of the business, but have a limited or out-of-date idea of their enterprise’s square footage, details of lease agreements, or comparable values in shifting real estate markets. Oftentimes it takes a major business event, like an M&A deal, to spur leadership to reexamine and understand real estate holdings and strategy. Regrettably, and all too often, principals come to that realization post-closing and realize they may have left money on the table.

In an M&A deal, the party that takes a proactive approach to real estate considerations gains an upper-hand in negotiations and calculating value. Real estate holdings can provide immediate opportunities for liquidity, cost-reduction, or revenue generation. At the same time, detailed due diligence can reveal redundant properties, costly debt obligations, unbreakable leases, and other red flags that would undermine value post-closing.

For both sides of the M&A transaction, real estate strategy and valuation should be a core consideration of the overall goals and value drivers of the deal. A direct path to this mindset is to place real estate holdings on the same level of importance as other assets that drive value – human capital, technology, intellectual property, etc. Ensuring that real estate strategy aligns with business goals and objectives will save considerable headaches and potential liabilities in the later stages of negotiating and closing the deal.
Qualify and confirm all real estate data

One of the harmful side-effects of a laissez-faire attitude toward real estate in M&A is that the entire deal can be structured around data that is simply inaccurate or incomplete. This inconsistency is not necessarily the result of an overt deception, but too often it is simply an oversight. Valuations can also be based upon pride and ego, without supporting market data.

Let’s visit a very common M&A scenario: The Target company has real estate data on file from when they purchased or leased the property (which may have been years ago), and that data says headquarters is 20,000 sq. ft. of office space. Perhaps they invested heavily into improvements like custom interiors that did nothing to add value to the real estate. The Target includes that number in the valuation process and the Acquirer assumes it is accurate. Following the deal, the Acquirer moves in and, in the worst case, realizes there is actually only 15,000 sq. ft. of useable space. Or it is equally common that the Acquirer learns the space is actually 25,000 sq. ft. Either way, value has been misrepresented or underreported. M&A deals involve a multitude of figures and calculations, and sometimes things are simply missed. But those small things can have a major impact on value and performance in the long run.

The only solution to this problem is to dedicate resources to qualifying and quantifying data related to real estate holdings. When preparing to sell, Target companies should review all assumptions – square footage, usage percentage, useful life, etc. – and conduct field measurements and physical condition assessments (“PCA’s”). This will help your team understand the value of your holdings and set realistic expectations, and perhaps just as importantly, it saves you from the embarrassment of providing inaccurate numbers exposed during Acquirer’s due diligence—and getting re-traded on price and terms. That reputation will ripple through the marketplace.

From the Acquirer’s side, the details of real estate holdings should come under the same level of scrutiny as financials, control environment, etc. Your due diligence team should commission its own field measurements and PCA, and also seek out market comparables to confirm appraisals. It is simply unsafe and unwise to assume the accuracy of any of these details. Performing your own assessments could reveal a solid basis to re-negotiate the M&A, and will help shape post-merger integration planning.

Tax Analysis Will Reveal Risks and Opportunities

The maze of tax regimes and regulatory requirements cannabis and hemp operators navigate naturally creates opportunities to maximize efficiencies. This is particularly the case when it comes to enterprise restructuring to navigate the tax burden of 280E.

For example, it may be possible to establish a real estate holding company that is a distinct entity from any “plant-touching” operations. By restructuring the real estate holdings and contributing those assets to this new entity it may be possible to take advantage of additional tax benefits not afforded to the group if owned directly by the “plant-touching” entity. This all assumes a fair market rent is charged between the entities.

Recently, operators have looked to sale/leaseback transactions to help with cash flow needs and thus these types of transactions have gained prominence for cannabis and hemp operators. It is important that these transactions be carefully reviewed prior to execution to ensure they can maintain their tax status as a true sale and subsequent lease, instead of being considered a deferred financing transaction. If a Target company has a sale/leaseback deal established but under audit the facts and circumstances do not hold up, this could open up major tax liabilities for the Acquirer.

When entering into an M&A transaction, it is important that the Acquirer look at the historical and future aspects of the Target’s assets, including the real estate, to maximize efficiencies of these potentially separate operations. It is also equally important to review pre-established agreements/transactions to ensure the appropriate tax classification has been made and that the appropriate facts and circumstances that gave rise to the agreements/transactions have been documented and followed to limit any potential negative exposure in the future.

Contract Small Print Could Make or Break a Deal

An area of particular focus during due diligence should be a review, and close read, of the Target company’s existing property leases and other contracts. There are any number of clauses and agreements that seem harmless and inconsequential on the surface, but can have disastrous effects in difficult situations. In many cases the lease/contract of a property is more important than the details of the property itself. For example, if the non-negotiable rent on a retail location is too high (and scheduled to go higher), there may be no way to ever turn a profit.

The financial distress resulting from the COVID-19 pandemic has brought these issues to the forefront in the real estate industry. Rent payment and occupancy issues are shifting the fundamental economics of many property deals and contracts. If, for example, you are acquiring a commercial location that is under-utilized because of market demand or governmental mandate, you must confirm whether sub-leases or assignments are allowed at below the contract price. If not, you could be stuck with a costly, underperforming asset amid quickly shifting commercial real estate demand.

In many leases and contracts there are Tenant Improvement Allowance conditions that require the landlord to fund certain property improvement projects. If utilizing these terms is part of the Acquirer’s plans, you may need to have frank and open conversations with landlords about whether the funds for these projects are still available, and if those contract obligations will be met. Details like these are often penned during times of financial comfort without consequences to the non-performing party, but a landlord struggling with cash flow may not have the capability to meet contract standards.

These are just a few examples from a multitude of potential real estate contract issues that can emerge. It is recommended to not only examine these contracts very closely, but have dedicated real estate industry experts perform independent assessments that account for broader social, economic, and market realities. That independent analysis will help your executive team formulate a real estate strategy that better aligns with core business objectives.

Dig Deep to Uncover Real Value

There are countless scenarios where issues related to real estate make or break an otherwise solid M&A transaction, whether before or after closing the deal. The only path forward is to treat real estate holdings with the same care and attention paid to the other asset classes driving the deal. The cannabis and hemp industries have recently endured micro-boom-and-bust cycles that have left many assets under-performing. As Target companies offload these assets, and Acquirers seek out good deals, both parties must undertake focused efforts to establish the fair value of complex real estate assets and obligations.

Catch up on previous articles in this series:

• Choosing the Right Cannabis M&A Structure for You

• Cannabis Post-Merger Integration: Strategies for Success

The post Cannabis M&A Real Estate Considerations: Risks and Values Right Under Your Feet appeared first on MGO CPA | Tax, Audit, and Consulting Services.

According to the CBCC press release, the emergency regulations are meant to address the vaping crisis: “The emergency regulations are designed to help consumers identify licensed cannabis retail stores, assist law enforcement, and support the legal cannabis market, where products such as vape cartridges are routinely tested to protect public health and safety.”

The code certificate needs to be posted within three feet of any public entrance to a cannabis dispensary or “in a locked display case mounted on the outside wall of the premises.” In addition to paper, the QR code certificate can be printed on glass, metal, or other material. It needs to be 8 ½ inches by 11 inches, the size of a standard sheet of paper. The code itself needs to be 3.75 inches by 3.75 inches.

The regulatory change was pursued by the CBCC to allow consumers and law enforcement officials to be able to quickly discern the origin of a product and ensure its safety after the code is scanned. QR codes will help consumers know they are purchasing a product from a vendor in the legal market.

The cartridges that caused the illnesses that led to the vaping crisis last year originated in the underground market. As of February 18th, 2020, the CDC reported 2,807 cases of illness associated with e-cigarettes across the U.S. and 68 cases resulted in deaths, with four of those in California.

“The proposed regulations will help consumers avoid purchasing cannabis goods from unlicensed businesses by providing a simple way to confirm licensure immediately before entering the premises or receiving a delivery,” said CBCC Chief Lori Ajax.

Unfortunately, illegal cartridges with a lethal amount of Vitamin E look nearly identical to those from legal retailers, as do underground sellers who maintain brick and mortar stores. And because they are underground, they do not comply with regulations. Recent estimates have shown that in California, the underground black market is more than twice the size of the legal market.

Those with smartphones will be able to scan the QR codes to ensure the product comes from a licensed retailer. When they scan the code, it will send them to the BCC’s License Search database where they will be able to see the business license number, license type, its official name, contact information, business structure, premise address, license status, issue date, expiration date, and activities.

In addition, you can see whether the business holds a license for adult use, medical, or both. The database also includes phone numbers and email addresses for all the businesses. In addition, you can see if they hold multiple licenses. Many of the businesses also have links to their respective websites. Active licenses are listed along with those who are suspended, canceled, revoked, inactive, or expired.

While the emergency regulations present another regulatory hurdle for compliant California cannabis businesses, the silver lining is that legal market operators can now advertise their compliance with safety standards — an additional edge in the battle to win market share from black market operators.

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