• LinkedIn
  • Facebook
  • Twitter

CPAs & Advisors to the Cannabis Industry Since 2009 Schedule An Appointment

Bridge West LLC
  • About Us
    • Firm Overview
    • Leadership
    • Our Companies
    • Industry Affiliates
    • International Affiliations
  • Services
    • 280E Mitigation
    • IRS and State Audit Assistance
    • Advisory Services
    • License Application Advisory Services
    • Business Valuation
    • Financial Statement Audit and Other Attest Services
    • Tax Compliance
    • Outsourced Accounting Services
    • Investment Advisory
    • Technology Services
  • Industries
    • Cultivator
    • Processor
    • Dispensary
    • Vertical
    • Hemp
    • CBD Retail and E-commerce Operators
  • Events
  • Cannabis News
    • CannaBlog
    • Podcast
    • Webinar
    • Videos
  • Client Access
  • Careers
  • Contact
  • Menu Menu

Section 280E and Cost of Goods Sold for

Cannabis Businesses

CannaBlog by Cory Parnell, COO of Bridge West CPAs & Advisors to the Cannabis Industry

As anyone in the cannabis or hemp industries knows, preparing for 280e cannabis taxes is a regular—if dreaded—annual (or even quarterly) event. We’ve written about 280E and its implications for cannabis business tax preparation: Unlike most enterprises who tabulate COGS (or “cost of goods sold”), cannabis operators bear an additional burden regarding this uncontroversial aspect of tax law. Cannabis retailers, in particular, are especially hard hit, as they cannot consider selling and budtender labor as a COGS.

But recent guidance from the IRS suggests the bureau is working to help clarify some of the inequities associated with 280E cannabis business tax filings. If you’re tasked with bookkeeping for dispensaries, this is news you can’t afford to miss!

Cost of Goods Sold, Cannabis-Style: Implications of 280E

In essence, Section 280E of the tax code disallows cannabis and other businesses from claiming average depreciation taxes:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or activities which comprise such trade or business) consists of trafficking in controlled substances.

For most other businesses, the COGS expenses—such as the cost of materials and labor, the wholesale price of goods to be resold, overhead, storage, and other costs—can account for a sizable deduction. But in cannabis accounting, the only COGS deductions generally allowed are for equipment used in storage and packaging. And as we’ve seen time and again, any efforts to circumvent 280E usually ends poorly for cannabis operators.

That said, many cannabis CPA firms such as Bridge West are finding that IRC 471, a section of code dealing with inventories, offers at least some clarification and guidance. In general, 471 stipulates that the method used for inventory must clearly and precisely reflect the business’s income. Of course, there are many different types of cannabis companies. Various sections of 471 pertain to retailers and dispensaries, cultivators, and processors of concentrates and edibles, among others.

In the recent IRS guidance we referenced above, the bureau acknowledged the confusion surrounding the cost of goods sold for cannabis companies, adding that while normal overhead expenses—including advertising, wages, and travel expenses—still aren’t deductible, the cost of obtaining a business’s inventory is.

While this doesn’t remove the burden of 280E entirely, the IRS letter strengthens what we hope is a coming sea change regarding how cannabis business tax is calculated. As we shared earlier this year, passage of the 2018 Farm Bill expanded the range of deductions allowed to cannabis growers and extractors, including the cost of depreciable assets such as cultivators and processors.

In the short term, what can you do to reduce your 280E cannabis tax exposure?

  • Keep exceptionally clean and precise records of all business expenses
  • Back up your data regularly and ensure that more than one person in the organization has knowledge of and access to financial information
  • Use GAAP principles and keep good production numbers and records. While it may cost you more in the short term, it’s well worth it in the long run!
  • Use the best cannabis accounting software you can afford: A platform explicitly tailored to the industry will be an immeasurable help in keeping accurate records and delivering information to the IRS in a simple and timely fashion.

Cannabis CPA: Expert Advice on 280E, Cannabis Taxes, and More

At Bridge West CPAs & Advisors, we focus on helping our clients reduce their tax burden. If you’d like to know more, we’d love to talk. Now into our second decade of assisting entrepreneurs in navigating the intricacies of 280E, Bridge West CPAs is ready to help you reach your business and financial goals.

Schedule an Appointment

Newsletter Registration

Recent Posts

  • Minnesota Cannabis Updates 2023: Current License Holders
  • Why You Should Outsource Accounting for Your Cannabis Business
  • Updated Cannabis Industry Events
  • The Cannabis Industry and Tax Implications of Entity Structure: Issues to Consider for Cannabis Operators
  • What is Form 1099: Key Details You Need to Know

Services

280E Mitigation

IRS and State Audit Assistance

Cannabis and Hemp Advisory Services

Cannabis License Application Advisory

Business Valuation

Audit and Assurance

Tax

Outsourced Accounting Services

Investment Advisory

Technology Services

Resources

Contact

Events

CannaBlog

Leadership

Client Access

Serving all cannabis legal states

Headquarters:
7900 International Drive, Suite 800
Bloomington, MN 55425
(303) 651-0304
View Map >

© Bridge West LLC™ 2023 Privacy Policy
  • LinkedIn
  • Facebook
  • Twitter
Webinar: Why is the IRS Targeting Cannabis Businesses with 280E Audits?Colorado Cannabis Consumption Lounge – Tetra Lounge
Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

OKLearn more

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Privacy Policy
Accept settingsHide notification only