Cannabis Accounting Questions, Answered
The questions operators actually ask us, answered plainly.
Frequently Asked
What is IRC Section 280E?
Section 280E denies ordinary and necessary business deductions to any business trafficking in Schedule I or II controlled substances. Cannabis remains Schedule I federally, so licensed cannabis businesses cannot deduct expenses such as rent, payroll, or marketing even though they operate legally under state law.
Why does 280E apply to legal cannabis businesses?
Because 280E turns on federal scheduling, not state legality. A business fully licensed and compliant under state law is still, for federal tax purposes, trafficking in a Schedule I substance.
What can a cannabis business actually deduct?
Cost of goods sold is not a deduction — it reduces gross income before 280E applies. Section 471 governs what may be capitalized into inventory, which is why cost allocation is the central issue in cannabis tax planning.
Do cultivators get better treatment than retailers?
Effectively, yes. Producers may generally capitalize more into inventory — direct labor, cultivation supplies, allocable indirect production costs — while a retailer's capitalizable costs are narrower.
Does 280E apply to hemp and CBD?
No. Hemp containing no more than 0.3% delta-9 THC was removed from the Controlled Substances Act by the 2018 Farm Bill, so compliant hemp and CBD businesses may take ordinary business deductions.
What happens if cannabis is rescheduled to Schedule III?
280E applies only to Schedule I and II substances. A move to Schedule III would end its application going forward, materially changing the economics of every licensed operator. Timing and final form remain unsettled and litigation is likely.
What does the IRS look at in a cannabis audit?
Almost always the same thing: whether costs classified as cost of goods sold were properly capitalizable under §471, whether the allocation between production and non-production functions is supported, and whether contemporaneous records exist.
Do you work with businesses outside Georgia?
Yes. Our clients are in more than 30 states. Cannabis accounting is primarily a federal tax problem with state-specific compliance layered on top, and we handle both remotely as a matter of routine.
What does cannabis accounting cost?
Monthly accounting engagements are priced by transaction volume, entity count, and complexity. Tax and advisory work is scoped per engagement. We quote before we start.
Can you take over mid-year?
Yes. Most clients arrive mid-year, often after an unwelcome surprise.
We're pre-license. Is it too early?
No — it is the best time. Entity structure and cost accounting decisions made before you open determine your 280E exposure for years.
We're behind on filings. Can you help?
Yes. Back-tax resolution and IRS representation are core services, and unfiled returns are more common in this industry than anyone admits publicly.