{"id":250,"date":"2021-05-19T23:31:51","date_gmt":"2021-05-19T23:31:51","guid":{"rendered":"https:\/\/cannabistaxattorney.us\/?page_id=250"},"modified":"2022-09-02T18:35:13","modified_gmt":"2022-09-02T18:35:13","slug":"the-cost-of-goods-sold-cogs-for-marijuana-cultivators","status":"publish","type":"page","link":"https:\/\/cannabistaxattorney.us\/cost-of-goods-sold\/marijuana-cultivators\/","title":{"rendered":"The Cost of Goods Sold (COGS) for Marijuana Cultivators"},"content":{"rendered":"\n

Those involved in cannabis businesses are probably already familiar with the much-debated and much-maligned application of the federal government\u2019s IRC 280E on state-sanctioned and legally operating cannabis businesses. As a brief summary, legally operating cannabis businesses are not allowed to claim any credit or deduction to their taxable income<\/a> even if they are legally operating, like any other regular business, under state law.<\/p>\n\n\n\n

At present, there seems to be some movement in the policy approach to 280E, due, in large part, to the very real financial drain that 280E poses to legally operating cannabis businesses. But until and unless there is a definitive change implemented by Congress relieving this burden, cannabis businesses have no choice but to work with what they have. And that includes making use of Cost of Goods Sold (COGS)<\/a> adjustments to their gross receipts.<\/p>\n\n\n\n

Jin Kim is a California tax attorney<\/a> helping cannabis businesses resolve outstanding federal and state tax debt. Through her tax law firm<\/a>, she represents cannabis dispensaries in audits, offers in compromise, payroll tax arrears, and installment agreement applications. To learn more about your tax resolution options, call her firm at (916) 299-9913<\/strong> to schedule a free consultation.<\/p><\/blockquote>\n\n\n\n

A Brief Overview of COGS<\/h2>\n\n\n\n

Cost of Goods Sold, or COGS, for short, refers to all the costs and expenses that went directly into the production or manufacture of the product that is eventually sold. So literally, the costs that went into the product that is sold.<\/p>\n\n\n\n

COGS does not, however, include costs that are not directly related to the production or manufacture of the products. So costs that went into, for instance, marketing and overhead costs, would not be considered COGS.<\/p>\n\n\n\n

Why is this important for cannabis businesses to know?<\/em> It is important because, at present, COGS seems to be the only way for cannabis businesses to minimize or reduce the taxes they owe on their income. Since they are not allowed to make any deduction or take any credit on their taxable income, they would essentially have to pay tax on their entire taxable income. This makes for a very expensive way to run a business. COGS, however, can help to alleviate this tax-centric dilemma. To put it simply, cannabis businesses can deduct COGS<\/a> from their gross receipts, thereby lowering their taxable income, and as a direct result, the tax they owe to the federal government on their income.<\/p>\n\n\n\n

COGS for Marijuana Cultivators<\/h2>\n\n\n\n

Unfortunately, there is yet no definitive guide on what costs are considered to be part of COGS. What we have, really, is simply a general definition of COGS as the total cost associated with the production or acquisition of any goods that are sold during the reporting period. Obviously, the COGS for a cannabis retailer<\/a> is completely different from a cannabis manufacturer.<\/p>\n\n\n\n

For those whose primary business is the cultivation of marijuana, their COGS would typically include all the costs that they had to expend in growing the marijuana plant. These would therefore include the following costs:<\/p>\n\n\n\n