Cost of Goods Sold, inventory accounting, and accrual accounting is of upmost importance to businesses that get hit with §280E, i.e. Cannabis businesses.§280E is the section that prohibits deductions and credits for any trade or business activity that “consists of trafficking in controlled substances….”
A Cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a Cannabis reseller this includes the cost of Cannabis itself and transportation used in acquiring Cannabis. To the extent greater costs of doing business can be legitimately included in COGS, lower taxable income will result.
You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a Cannabis CPA can help ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in a lower possible income tax liability.
You will need to make sure you have an accounting system that will provide clear and concise records. For a Cannabis business this is further complicated due to the limitation of deductions against income for federal purposes.
This is not for the faint of heart, it requires an understanding of cost accounting and the willingness to apply consistent, logical, and documented application to a well thought out process. Messing this up can cost you big time upon IRS audit, so work with a CPA to help you get an accounting system that will help you limit any potential liability.
By setting up a proper accounting system to record transactions and maintain books and records during the year you are rewarding yourself with the ability to generate interim financial information that will give valuable insights into your operations and profitability.
Also when it comes time to prepare your federal tax return everything will be completed and you will avoid that year end scramble to get everything ready for your tax preparation. This is where your maintaining the proper set of accounting procedures can pay for itself.
About the Author
Bruce Jolliff, CPA is a Certifed Public Cannabis Accountant, Independent Financial Consultant, CFE (Certified Forensic Examiner) and CFO-For-Hire. He has extensive experience in the Cannabis industry, acting as a CFO for hire, preparing documents for SEC filings, forensic accounting and more.
Bruce prepared audits for $550+ Million dollar organizations in compliance with Sarbanes-Oxley, reducing auditing time by 46%.
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