280e and 471...what's the big deal?

Updated: Jul 21

If you've spent any time in the Cannabis industry, you've heard about 280e and how it puts the screws to businesses legally operating in states that have legalized cannabis in one way or another. So, what is "280e" anyway? It's actually just one sentence:

"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 the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."

What this means is that, unlike most every other type of business, a cannabis business is not allowed to include any deductions or credits. That puts companies who are operating LEGALLY within their state at a huge disadvantage. However, cannabis businesses are allowed to deduct Cost of Goods Sold (COGS) and to maximize it using IRC 471. IRC 471 dictates to businesses what items to include in inventory (and ultimately COGS) and just as important, what not to include. For Dispensaries, IRC 471-3 essentially says that retailers can only include in inventory/cogs what they paid for the product and maybe some transportation costs. For producers (growers, cultivators, etc.), IRC 471-11 applies and here is where a lot more can be booked to inventory/cogs, ultimately lowering taxable income. IRC 471-11 dictates that direct costs (direct material and direct labor) be booked to inventory. It also gives 3 categories of indirect costs that must be navigated as well. Category (i) includes items that must be included in inventory, category (ii) includes items that can not be included in inventory and category (iii) includes items that can be included in inventory if it properly reflects recurring financial statement treatment month in and month out and is in compliance with GAAP.

In every instance when a potential client opens up their books for us to review, we've NEVER seen this done correctly. Usually they're not adhering to 280e at all OR they're doing it wrong and this is literally an 'audit time bomb' waiting to go off. It's absolutely imperative that Cannabis CEO's are working with a firm that specializes in this highly technical niche. Green Summit Accounting, LLC is part of the leading national organization (DOPECFO) serving the Cannabis community, we have that technical expertise and would love to work with you.

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