280E and Cost of Goods Sold: Can’t win for losing
by Bernard Chamberlain
Cost of Goods Sold. Deductible or not deductible? That is the 280E question.
Section 280E of the Internal Revenue Code disallows many expense deductions for most Oregon cannabis businesses. It is well known that Section 280E creates a significant handicap for a cannabis business when compared to its non-cannabis brethren. However, a cannabis grower or a dispensary owner coming terms with their tax liabilities will eventual learn about “cost of goods sold” and its promise of deductible expenses.
What is “cost of goods sold?”
(COGS) is an accounting concept, also existing under U.S. tax law, that approximates the cost of inventory sold during the year. Its purpose is to match the cost of inventory to the year in which the inventory is sold.
Under generally accepted accounting principles (GAAP), the so-called “matching” of expenses to revenue is necessary to accurately reflect the income of an inventory business. Without that matching, income of a business could vary significantly from year to year, depending on inventory levels, making it difficult to gauge the health of the business.
COGS takes on greater significance in the Section 280E context because of its place in the calculation of income under U.S. and Oregon tax law. Rather than being just another deduction disallowed by Section 280E, COGS is technically an adjustment to income. Thus, Section 61 of the Internal Revenue Code, and the Treasury regulations under that provision, state that “gross income” for tax purposes is actually gross receipts minus COGS.
Clearly this is a complicated process and requires coordination with expert. At Emerge we are very careful to recommend and connect people in the Oregon cannabis industry with accountants who are well versed in 280E and Cost of Goods Sold. In an environment extremely unfriendly to cannabis businesses effectively tracking and reporting COGS can have a significant impact on the survival of your business.
An Oregon cannabis lawyer can provide assistance to a cannabis business and its accountants exploring the use of beneficial rules in this area.