Medical bottles, mylar bags and glass jars, with a strain label and business logo. Or, depending on the product, maybe silicon containers and food wrapping too. But that’s usually it when it comes to packaging of medical cannabis products – just the necessities. After all, why put in much effort beyond packaging basics, especially when patients most likely do not think twice about it, and any changes might be an added cost?
Let’s talk about something exciting first – the marketing aspect. Packaging is a great way to showcase your brand, logo, or company message – the “image” you want to portray. Not only is having your business image on all of your products a way to advertise, overtime powerful image recognition can become your strongest Asset.
Typically marketing type activities are treated as an administrative and operating expense on the accounting income statement, or business profit and loss report. This category also includes expenses related to promotions, events, and other types of company or brand awareness activities.
For medical cannabis businesses and caregivers, though marketing type activities and related expenses are necessary to the course of business growth, they are not deductible for Federal Tax purposes because of the limitations of IRS Code Section 280e. Often one of the highest costs to a growing or emerging business, these types of expenses end up costing even more with the tax implications considered, and must be consistently delivering value in order to be effective.
There’s a much higher perceived value in advertising and event promotion, and focus tends to be shifted to these types of expenses as a result, even though they are not deductible for tax purposes.
In turn, costs involved in packaging are usually minimized, and rarely is it used creatively beyond its basic purpose. However, a knowledgeable accountant will tell you that packaging costs are deductible for tax purposes, even for medical cannabis businesses. Correctly applied, expenses like this can provide your business a significant tax benefit.
So, how do you create more value for these types of costs, for both patient satisfaction and business growth purposes?
Maybe your company has a message it wants to spread or stand by, or certain objectives in doing business. These could include being a people and culture focused organization, environmental awareness and balance with nature initiatives, supporting community programs or volunteer projects, or having overall high quality of products, service, and level of company integrity.
What ever image you want your business to be known for is where your expenses should be focused long term. In the right light, costs should in fact be investments – looked at as spent to help your business move forward.
Having said that, for cannabis related businesses, costs should also be focused with a little tax strategy involved as well –
That’s where packaging comes in, and quickly becomes one of your most important business and accounting tools!
Packaging, when treated as a cost to make a product ready and available for sale, or in accounting terms, as part of the Cost of Goods, automatically becomes an investment in your company, though in a not so recognizable way.
When treated as a product cost, the cost of packaging is included in the cost of your inventory. This is the correct accounting treatment because the product would not be ready for sale without the packaging. (You would not offer patients loose cannabis flowers with nothing to hold them!) Once your inventory is sold, all related costs can then be written off as Cost of Goods Sold. Costs of goods sold are the only costs deductible for federal tax purposes by a company or individual falling under Section 280e.
Section 280e, which prohibits business expense deductions for those involved in trafficking a controlled substance (aka medical cannabis), does not prohibit businesses or individuals from deducting the cost of their returned capital, or in this case, the cost of their sold inventory. This concept has been consistently upheld, and was also addressed and confirmed by the IRS in a 2015 memo, specifically for the medical cannabis industry.
So, we know that packaging is a deductible cost, when treated as part of the cost of inventory when sold. Now, how can you maximize your investment in this type of deductible cost to benefit your business objectives even further?
Here’s an example – Maybe your goal is to promote your company image, which includes offering high quality products, environmentally friendly practices, and supporting the local community. If this is the case, the costs in your business would reflect these initiatives.
Often, the stronger the inclination to support your initiatives, the higher the costs will become –
Given its goals, your business may decide to invest heavily in all reasonable methods for showcasing its values. As a result, it invests its costs in hemp based biodegradable containers, labels printed with naturally based ink, customized molded containers for specialty products, and hiring a local artist to create custom designed sticker images for each of the strains offered as the main package label.
Each packaging initiative supports the business’s goals, furthers its image awareness, and becomes a tax deductible expense.
Ideas like this may be going overboard for some, but the point is to showcase the additional value and strategy in investing costs towards product packaging. A business’s image can come across in many ways. The value may be intensified by consistency of appearance, as well as packages being the “take home” for patients and other customers to remember.
Packaging is a great tool because of the flexibility it offers. It can be basic and designed to minimize costs; Or, it can be utilized to its fullest extent – to increase image, brand, or message awareness as part of your product and business investment and growth strategy.
As long as packaging costs can be directly related to making a product ready for sale, they can be included as part of product (inventory) costs when accounted for correctly. For medical cannabis businesses paying income taxes at higher than normal rates (often effective at 70-80%), the concept of deducting cost of goods sold is crucial to strategic planning, and in fact the only tax benefit your business is allowed!
So the next time you are considering placing an ad or sponsoring an event booth to increase your company and brand awareness, or have the option to invest in customized product packaging that supports your message instead, the extra product investment cost in a unique container may very well pay off in more ways than you first thought!
Just make sure to work with a specialized CPA or accountant to be confident your packaging costs (and all costs!) are accounted for properly!
At LC Solutions Michigan, PLLC we specialize 100% in providing accounting services for the medical cannabis industry. We provide full bookkeeping and cost accounting services, as well as CPA services for those in Michigan, and have plenty of ideas on how to make the most of your cost of goods strategic goals!
Copyright, LC Solutions Michigan PLLC, July 6th, 2017