email me for the white pages with how the law was established and my cliff notes how to get around it
I hope all the people on this web site have no issues @ tax time…
Business taxes were due March 15 and if you did not submit extension, monthly penalty is 150 per owner. So you have 4 people on your LLC that will be 600 per month late fees.
I have been involved in a series of lectures regarding 280E. One practitioner advised using IRC 471 for COGS while another advised claiming 263A. I was wondering what your thoughts are on the subject.
You jumped a couple of steps here…the first thing you need to do is get a copy of CCM 201504011 which has a reasonably good discussion. You will see in there that it makes reference to inventory capitalization provisions that existed when IRC Sec. 280E was put into the law…hint, there was no IRC Sec. 263A at that point in time. The reference to IRC Sec 471, actually the regulations essentially mirror’s financial accounting rules.
There are two big questions…what kind of business is it…dispensaries are what most of the case law is about. The proper treatment for cultivators, distributors and extractors is vastly different. I am not going to lay out the nuances of how we earn a living, however, the memo here would be a good starting point.
Marijuana Business Cost of Goods Sold (“COGS”) Overview
Many cannabis-related businesses would like to take deductions for the costs related to their business activities. However, the tax code, Internal Revenue Code (“IRC”), has some very specific provisions regarding the businesses that are permitted to take cost of goods sold (COGS) deductions and which expenses may be included. COGS is at the core of all marijuana related businesses as its one of the key factors to reducing your taxable income.
Although figuring out which deductions are permitted can be tricky, it’s in your best interest to claim all of the deductions that your business is allowed. COGS is a important deductions that marijuana-related businesses are allowed and can have a considerable effect on the effective tax rate for your business.
Consider the following examples:
Example 1. For a business with gross receipts totaling $776,772, a business with a high COGS could deduct $435,829, leaving a gross income of $340,953. Thanks to these allowed deductions, this business paid taxes on $340,953 instead of on $776,772. As a result, the business’s effective tax rate was 44% of its final earnings.
Example 2. For a business with gross receipts totaling $776,772 and a low COGS with only $50,000 in COGS deductions, the gross income of the business was $726,772. Therefore, this business would pay taxes on $726,772. For this business, the effective tax rate was 94% of its final earnings.
Simply taking COGS deductions rendered a 50% difference in the effective tax rate of each of these two businesses! As a result, claiming deductions for COGS could mean substantial tax savings for your business.
Here is a quick guide to help you understand what COGS deductions are permitted for your cannabis-related business.
Cannabis-related Businesses and Claiming COGS
Although, cannabis-related businesses are currently illegal under federal law, every business in this industry is still obligated to pay federal income tax on its taxable income because IRC § 61(a) does not differentiate between income that has been earned from legal sources and income that has been earned from illegal sources.
In 1982, Congress enacted § 280E, which prohibits deductions and credits for businesses trafficking in controlled substances. However, in a later case, Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner, 128 T.C. 173 (2007) (“CHAMP”), the government acknowledged that § 280E does not prohibit a taxpayer from claiming COGS. In other cases involving non-medical marijuana or other Schedule I controlled substances, the Tax Court recognized that § 280E does not disallow adjustments to gross receipts for COGS.
Chief Counsel Advice (CCA) 201504011
As a result of these rulings, the IRS determined that marijuana-related businesses could claim certain COGS deductions. On Jan. 23, 2015, the IRS Office of Chief Counsel issued Chief Counsel Advice (CCA) 201504011 to clarify that although deductions may not be claimed for trafficking marijuana, the CCA allows a cost-of-sales deduction for indirect production-related business expenses.
The memo concluded that although marijuana-related businesses are permitted to determine COGS, they must do so using the § 280E as it was enacted in 1982 and § 471, which makes the provision for the use of inventories to determine business income. When §280E was enacted in 1982, an ‘inventoriable cost’ referred to any costs that could be capitalized to inventories under §471.
Capitalization simply means delaying the recognition of an expense by treating the item as a fixed asset rather than recognizing the cost in the period that it was incurred. Capitalization is generally only used by companies that operate on the accrual basis of accounting.
In addition, the IRS concluded that these businesses are not permitted to calculate COGS using the more recent IRS regulations which can be found in § 263A, which permitted the inclusion of additional expenses, namely purchasing, handling and storage expenses, and service costs.
In order to claim any of the permitted deductions, the items must be “ordinary and necessary” within the meaning of § 162.
IRC § 162 is one of the most important sections in the tax code because it defines what a deduction is. The IRC requires six different elements to claim an item as a business expense in order to claim a deduction.
These elements are that the cost is:
1. Ordinary and necessary; 2. In carrying on; 3. A trade or business activity; 4. That it is an expense; and 5. That it was paid or incurred during the taxable year for which the return will be filed.
The IRS findings explain what a deduction is and which expenses could be considered as COGS. Finally, it should be noted that the IRS concluded that the IRS has broad authority to require the marijuana-related business to change its method of accounting and to challenge the deductions claimed.
What Expenses Can Be Considered as COGS?
The IRS has made specific provisions for marijuana resellers versus producers.
CCA 201504011 clarified that, for resellers, the costs that they incur that are otherwise nondeductible under § 280E may not be deducted as COGS. These costs that are non-deductible are those that are directly related to the trafficking of marijuana.
For resellers, this means that only the invoice price of purchased cannabis, less any trade or other discounts, as well as, the transportation and other costs necessary to gain possession of the inventory can be considered as COGS.
For cannabis-production businesses, there are significantly more opportunities to claim items as COGS. Production-related wages, rents, and repair can be considered as COGS upon the sale of the inventory for accrual-basis taxpayers and immediately for cash-basis taxpayers that are cannabis-production businesses. However, marketing and general business expenses remain nondeductible.
Indirect production costs that may be considered as COGS include:
● Repair expenses, ● Maintenance, ● Utilities, ● Rent, ● Indirect labor and production supervisory wages, including basic compensation, overtime pay, vacation and holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under section 105(d)), shift differential, payroll taxes and contributions to a supplemental unemployment benefit plan, ● Indirect materials and supplies, ● Tools and equipment not capitalized, and ● Costs of quality control and inspection,
only if these costs are incident to and necessary for the production of cannabis. If these expenses are not related to cannabis production then they are nondeductible.
The IRS has also permitted producers to claim some additional COGS deductions, as long as the company makes sure to produce financial statements that are in accordance with Generally Accepted Accounting Principles (GAAP).
These expenses include:
● Taxes deductible under § 164, other than state, local, and foreign income taxes; ● Depreciation and depletion; ● Deductible employee benefits, including pension and certain profit sharing contributions, workers' compensation expenses, stock bonus plans, premiums on life and health insurance, and miscellaneous employee benefits such as safety, medical treatment, cafeteria, recreational facilities, and membership dues; ● Costs pertaining to strikes, rework labor, scrap, and spoilage; ● Administrative expenses related to production; ● Officers' salaries related to production; and ● Insurance costs related to production.
While the provisions of the tax code do give some cannabis-related businesses the opportunity for some tax breaks, the IRS does not allow such businesses to take the same deductions as businesses in other industries. However, the repeal of § 280E of the IRC could make the burden lesser for cannabis-related businesses who have reported tax liabilities of up to 70% of their income.
We have two observations on the post above Sharon Burns.
- It was PLAGIARIZED 100% from a post by Derek Davis from California Cannabis CPA and you can see that here.
Here is the link to the post that is was plagerized from https://www.californiacannabiscpa.com/blog/marijuana-business-cost-of-goods-sold-cogs-overview
- It would be so bad if you had provided attribution. However, the content of Darek Davis’s article contains numerous errors. Perhaps Mr. Davis would care to join this forum, and we could have a discussion about why he is wrong, and the potential consequences to anyone that implements what suggests.
We work our butts off to produce ORIGINAL CONTENT that we are fully responsible for, can explain, and have testified in court about. Creating an illusion of expertise where it doesn’t exist is perhaps the cruelest and most sadistic thing that a service provider can do to a client.
One of the most important skills that a professional can learn if you are going to discuss technical material on the internet is proper techniques of giving other’s credit for their work. You can learn more about that through the article at thislink.
I am Sharon’s assistant she is on vacation until August 15th.I received your email and I was trying to help so I found this. I just told Sharon and she said never reply if you do not know the answer and she said she will talk to me when she gets back I think I am in trouble again:(
Your effort is certainly appreciated…Carol. However, PLEASE understand that we work VERY hard a producing our own content…and couldn’t be more pleased when someone quote us, but the key is attribution. Please do yourself a favor and read this. https://abizinaboxcannabis.com/post-stupid-stuff-make-sure/
So sorry Sharon get a lot of emails 300-400 per day all I was to do answer or send to staff emails from current clients if immediate attention is needed…I over stepped my part time job…Sharon is so busy first break in over 2 years I thought I was helping. She is turning down new business because she can not find right people to work with her and the small team she has.
I am 70 and my job is to answer emails and phone calls only. She’s not mad she laughed called me silly girl:) She’s fun to work with
You rock, Carol!
Did I mention I am 70 and just learned Twadder is twitter today.
You’re awesome, Carol!
I like Twadder better.
We all have much to learn from @jszesq!
Wow good catch! That took a ton of time to for that dude to make it.
Well…it may have taken a long time, but it is riddled with errors…but, YMMV.
Carol was fired she asked a client of mine famous actor for an autograph picture. It has nothing to do what she posted on this site…
263A can not be used a tax strategy under 280E use. 263A transforms non-deductible expenses into capitalizable “cost”. Using 263 may cause you complications if audited.
I just receive a call new grower they have a CPA who said: under Farm act some “new Growers” are setting up their books as farmers NOT cannabis farms and not under 280E restrictions.I would not tell anyone to do this
She is lucky to have you on her team…I trust you understand my concerns…and that there was an important lesson here that I truly hope everyone learns from.