Ideas for Provisioning Centers to Minimize 280E Impact
The amount of taxes they pay is a somewhat rude shock for most provisioning center owners or business managers. Sales tax, excise tax, and income tax are all relatively new to the cannabis industry. (In recent historical terms!) We discuss tips on how provisioning centers can minimize 280E impact below.
Federal income taxes are the largest expense to a marijuana provisioning center. Provisioning center businesses are limited in the expense deductions they can take for federal income taxes. See more information in our post about how 280E Impacts Marijuana Businesses.
Section 280E disallows all expense deductions for cannabis businesses – except for cost of goods sold “COGS”. This limitation is for federal income taxes and in place because cannabis is still illegal federally.
Here are 5 Potential Strategies for Provisioning Centers to Minimize 280E Tax Burden:
Be Proactive in Building Space Planning!
Building space should be clearly divided for provisioning (selling) activities vs. inventory management (COGS) activities. A provisioning center may be able to allocate certain shared expenses to COGS. Shared expenses, like rent or electricity, that relate to certain inventory management activity areas may potentially be includible in COGS. A CPA or EA knowledgeable of 280E and cost accounting can help you determine the best approach. The process includes having a full understanding of the business’s workflow. A CPA can also help you set up a 280E compliant chart of accounts. This chart of accounts will help track allocations of shared expenses.
Get Strict About Employee Time!
The activities employees spend their time doing determine whether their wages paid for these activities are deductible. Certain employee wages may be includible in COGS. Employees should track their time by individual activities, such as Bud Tending vs. Inventory Packaging. Or, employees should perform one type of activity only – inventory management vs “selling” functions. A complete and accurate record keeping system should also be in place to track employ time by activity type. Certain wage costs may then be includible in COGS if accounted for properly.
Pay attention to Packaging!
This one is a favorite and applies to marijuana cultivators and marijuana processors as well. Packaging is necessary for every sale of medical marijuana, right? In most cases, packaging is includible in COGS. Allocations and complicated journal entries are not necessary to account for packaging.
Packaging is interesting because it can be used in many different ways. Uses of packaging are often basic in early marijuana businesses and evolve over time. Plain containers and bags are examples of basic packaging.
Packaging can also be used to increase brand awareness or support a social mission. Unique packaging can also help products have a better shelf presence and appeal more to a customer.
Packaging may better appeal to customers and yet still remain functional to product needs. A cannabis business may choose to express their brand or customer appeal through product packaging, instead of traditional advertising. Environmentally friendly packaging or other social based mission represented in the packaging may also help further the company’s goals.
Most packaging expenses can be includible in COGS with 280E accounting. Alternatively, most advertising expenses or customer marketing costs are not includible in COGS. These costs are not deductible, where packaging costs generally are.
Trade Advertising and Phone Calls For…
Evaluate the expenses that your business has that are not deductible under 280E. Expenses that are not deductible are not includible in COGS. Expenses not includible in COGS are advertising and marketing expenses and office administration expenses. Provisioning (selling) related expenses are also not includible in COGS. Bud tender wages, display cases, menu advertising, and waiting areas are selling related expenses. Selling related expenses like these are not deductible under 280E.
Provisioning center owners and business managers should carefully evaluate non-deductible costs. When reasonable, non-deductible expenses should be replaced with deductible expenses. One example of this is our packaging example. Another example might be to offer discounts or promotions instead of advertising or marketing. Inventory costs are includible in COGS, advertising and marketing costs are.
Utilize Inventory Management Resources!
Inventory management is crucial to the marijuana industry. Michigan’s marijuana businesses will report inventory daily via METRC. METRC is the state’s chosen tracking software provider and will report the inventory data the state requires. See this more information on this requirement here.
Provisioning centers who make inventory management a priority may also utilize a 3rd piece of inventory and cost management software. This software allows detailed tracking and reporting. Full inventory management software also offers detailed COGS tracking. Additionally, detailed tracking is great for making sure all COGS costs remain tracked and available for bookkeeping purposes.
Provisioning centers may also employ an inventory manager or inspector to perform inventory readiness functions. Inspection activities may include checking for mold or ensuring the correct amount of product received. Inventory management may also include storage, ordering, or even facilitating testing activities. Accounted for correctly, costs for inventory management or inspection may also be includible in COGS. A provisioning center should properly track all inventory management related costs in order to include the appropriate amounts in COGS. This includes a business owner who spends their time performing inventory management functions. Often, owner’s employee payroll costs can also be partly allocated into COGS when appropriate.
Strategic planning and specialized accounting are required when a business is subject to 280E!
At LC Solutions Michigan PLLC, we specialize 100% in accounting, CPA and tax services for medical marijuana businesses. Our team can help your business set up a 280E compliant accounting system (chart of accounts). We can also help with ongoing bookkeeping, cost accounting, tax planning and much more!
All medical marijuana businesses should work with a specialized CPA! Successful businesses in any industry often work regularly with a CPA. As a marijuana business, the regulatory and accounting environments are extremely complex. Work with an expert to help your business stay on track.
Please contact us here for more information or to schedule a consultation. You can also follow our Facebook page for daily tips, news and other information. We love talking about accounting peculiarities of the medical marijuana industry, and are here to help your business succeed!