This post was originally published on this site.
This guest column is from Paula Collins, EA, Esq., a tax attorney dedicated to the cannabis industry, a co-founder of the NY Consortium of Cannabis Accountants, and an adjunct professor at Pace University’s Elisabeth Haub School of Law, where she teaches Cannabis Law and Policy. The views and opinions expressed in this article are those of the author, and do not necessarily reflect the views or positions of NY Cannabis Insider.
Let’s talk tax. Specifically, cannabis tax.
If you’ve been around regulated cannabis for more than about ten minutes, you have heard one or more people launch into a shouting, cursing, enraged harangue about 280e. Mind you, most of the screaming tyrants have no clear understanding of exactly when in the business cycle they are directly hit with the realities of 280e, or whether 280e is a form? Or maybe it is something buried in the Controlled Substances Act (“CSA”)?
What they do know is that 280e is awful. It is the reason that even the most scrupulous cannabis entrepreneur is challenged to make a profit even if they are fortunate to have strong revenues.
New York is fortunate in that the state tax decoupled from Internal Revenue Code (“IRC”) 280e. That means that in New York, our cannabis companies can take the same deductions on their state tax return (not the federal return!) that other businesses take.
I am often asked, “You’re a cannabis tax attorney … can you get me outta this 280e sh%t with the IRS?”
Well, I really can’t. But wait…
In New York, the approximately 277 conditional cultivators/manufacturers/processors have some options that dispensary owners don’t really have. The keys to this treasure are in IRC 471 and classifications of inventory. Before we dive in, you might wonder, “What about the retail dispensary owners?” Well, sadly they can really only deduct the Cost of Goods Sold (“COGS”), which is the cost they paid to the cultivator/manufacturer/processor. Those neatly packaged gummies and vape pens and flower are the sum total of the deductions. Thanks, 280e.
But for cannabis businesses other than retail dispensaries, the work in progress and many of the production costs can be inventoried and applied to your deductible COGS. That includes:
- Wages and benefits paid to employees who were directly responsible for tasks like cultivating, harvesting, trimming, and processing;
- The costs of your raw materials, including the costs of seeds, nutrients, and packaging;
- At least a portion of expenses such as utilities, rent, depreciation of your production equipment, and even quality control costs.
There is no way to get expenses like marketing and office supplies worked into your COGS because those costs are not directly related to the cost of goods sold. Sorry – you can’t deduct the meals, airfare, hotels, conference tickets, and the round of drinks you bought at the bar in Vegas for MJBizCon.
In New York, IRC 471 might be one of the few examples in which it pays to be a cultivator, as opposed to a retail dispensary operator.
So next time you’re at a cannabis industry gathering and someone cranks up the 280e tirade, calmly ask if they have considered any COGS they could deduct pursuant to IRC 471. They might even share their weed with you just to hear you explain.