Surprise! The IRS Trick (there is no treat)

By now most, if not all of you, are aware of IRS Code Section 280E that prohibits the deduction of expenses for any business that is trafficking in controlled substances.   If you aren’t aware of this law, you need to be, but more importantly, you need to plan your cash flow (there’s that term again) to be prepared for higher than expected federal income taxes. Currently, marijuana is considered a Schedule I drug per the Controlled Substances Act and as such is treated as a federally illegal drug.  Income from the sale of illegal drugs is taxable for federal income tax purposes but expenses related to the sale of illegal drugs are not deductible.  This is Section 280E in a nutshell.  You must pay tax on the income of your cannabusiness and your associated expenses are not deductible from that income. There is one tiny glimmer of light in this dark IRS tunnel and that is that expenses associated with cost of goods sold i.e. your inventory costs, are deductible.  Perhaps now you understand why I have devoted so many words in my blogs to the subject of inventory.  Since currently it is the only deduction available to you for federal income tax, it’s hugely important.  I’ve touched on what can be included in inventory/cost of goods sold in previous blogs, that’s not the focus here.  The focus in this writing is to help you plan for the tax liability you will ultimately face. So far this doesn’t sound that bad.  But here’s what happens.  Your income statement may indicate that your company has made $130,000 for the year,...

When is enough inventory, enough?

What is the smart way to determine how much and what variety of inventory I should have on hand?  It’s an important question.  Whether you are a grower, processor or dispensary, inventory is an investment for your cannabusiness.  And like any investment, it’s important to consider how much you will invest and for how long. How is inventory an investment?  For starters, it costs you cash.  You are either paying for seeds, soil, pots, water, and electricity if you’re a grower; cannabis and other supplies if you’re a processor; or flower, tinctures, edibles, and all kinds of paraphernalia if you’re a dispensary.  In addition, you’re paying labor to grow, process and prepare inventory for sale.  Lastly, you’re paying rent or some kind of storage costs until you can get it out to your consumer.  Inventory (or cost of goods sold) will likely be the highest cost you have on your income statement, and may very well be the highest valued asset you have on your balance sheet. One differentiating factor with inventory investment as compared to other types of investments is that it generally doesn’t increase in value the longer you hold it.  In fact, it may reduce in value as time goes by, particularly if it has a shelf life associated with it.  Hopefully you’re not going to have products sitting in inventory for months on end, but it’s definitely something to consider when you start making decisions about when and how much to buy or produce. Acccounting nerds like me have a solution for this and like most things in our world, it requires a measurement.  In...

Accounting for Inventory in Cannabis Industry

Accounting for inventory in any business is tricky and the cannabis business is no exception. For producers, processors and retailers like yourselves, it is the main driver of profitability. I once had a client who owned a cookie business. She had a large market and her cookies were in high demand.   Her sales were climbing, yet she was making less and less.  When we delved into the calculation of her costs, everything seemed in good order. She had accounted for labor, materials, supplies, space, equipment, all of the “ingredients” to making her cookies. Each cookie cost $.79 and she sold them for $1.50, around a 47% gross profit. But as I investigated more, I discovered that she packaged the cookies in twos, so in fact the cost of her cookies was double what she thought, at $1.58. Selling them at $1.50 had her losing $.08 right off the bat and as her sales increased, so did her losses. Now that may seem like a novice mistake for some of you. But you can see how a small mistake in calculating the cost of your inventory, could lead to disaster. So what’s the secret to accounting for inventory in the marijuana industry?   A complete understanding of everything that goes into creating the product that you sell. It’s different for each category of sales. A producer has to consider the cost of land or space where they grow plus seeds, water, nutrients, labor to maintain and harvest, packaging for sale. Can they include the cost to maintain an office where orders are taken and bookkeeping is done? Probably not. What about...