Where the Tax Burden Actually Comes From
Under 280E, a business may still reduce gross receipts by cost of goods sold, because COGS is a component of gross income rather than a deduction. Everything below that line — selling expense, marketing, most administrative overhead, much of occupancy — is generally disallowed at the federal level. Two operators with identical revenue can report very different taxable income purely because one of them tracked production costs properly and the other did not.
That means the tax outcome is largely determined months earlier, in the chart of accounts, the labor tracking and the inventory system, not at filing time.
- Chart of accounts designed to separate production activity from selling and administrative activity
- Labor and payroll allocation tied to documented roles and time records
- Inventory absorption methodology applied consistently across periods
- Contemporaneous documentation supporting each allocation decision
Cost of Goods Sold Methodology
Cultivation, processing and retail activities absorb costs very differently. A producer capitalizes direct materials, direct labor and defined indirect production costs into inventory. A reseller's inventoriable costs are substantially narrower. Vertically integrated license holders carry both profiles inside one entity, which is precisely where methodology discipline matters most.
We document the treatment for each cost pool, build the allocation basis, and produce workpapers that a reviewer can follow from the general ledger back to source records.
- Direct material and direct labor identification
- Indirect production cost pools and allocation drivers
- Segregation of production, transport, retail and corporate functions
- Period-end inventory roll-forward supporting the tax return
Entity Structure and Segregation of Activities
Some operators separate non-plant-touching activity — real estate, intellectual property, management services, ancillary retail merchandise — into distinct entities. Whether that structure is appropriate depends on economic substance, intercompany pricing and the operating reality of the business, not on a template.
Because Florida licensees are vertically integrated by design, entity planning has to respect license conditions and ownership rules. We evaluate options with your attorney rather than in isolation.
Audit Readiness and Documentation
Cannabis returns draw scrutiny. Preparing as though every position will be examined is simply good practice. We maintain the workpaper trail — methodology memos, allocation schedules, inventory reconciliations and reconciliations between the seed-to-sale system and the accounting records — so that responding to an examination is a retrieval exercise rather than a reconstruction project.
Ongoing Planning Rather Than Year-End Reaction
Quarterly estimates, cash reserves for tax liabilities, and the timing of capital expenditures all interact with the 280E environment. We build a rolling view so that owners see the projected liability throughout the year and can plan distributions and working capital around it.
Frequently Asked Questions
- Does 280E apply to a licensed medical marijuana business in Florida?
- Section 280E is a federal provision that applies to trades or businesses trafficking in controlled substances under federal law, regardless of state licensure. State-legal medical operators have generally been subject to it. Because federal scheduling and litigation continue to evolve, positions should be reviewed with your tax adviser each year.
- Can cost of goods sold eliminate the effect of 280E?
- No. Careful, well-documented cost accounting determines how much of your spend is properly inventoriable, which affects taxable income. It does not convert disallowed selling and administrative expense into deductible expense, and no methodology guarantees a particular tax result.
- What records should we keep to support our COGS position?
- Time and labor records tied to function, production batch records, inventory movement reports from the tracking system, purchase invoices, allocation schedules and a written methodology memo explaining the basis for each cost pool.