There are several companies in the cannabis industry looking for tax breaks, loopholes, and strategies to optimize their finances. 

If you’re one of these companies then you know how crucial it is to increase and direct your revenue in the right areas of the business due to the high costs placed on the business by regulators. 

Incorporating IRC 471 cannabis cost of goods sold calculation can enhance your financial health, especially for taxes. To minimize your tax liability, you can either calculate all the business operations finances yourself or work with an accountant. 

Whether you choose one or the other, there are complex financials to consider and calculate within the business that’s not easy.  

This article further outlines the factors of IRC 471, how the Internal Revenue Code Section 280E influences companies, and ways to optimize COGS for proper accounting. 

Understanding IRC 471 COGS 

IRC 471 refers to Internal Revenue Code Section 471, which outlines the rules for determining the Cost of Goods Sold (COGS) for tax purposes. For cannabis companies, the calculation of COGS is crucial for determining their taxable income.

COGS includes the direct costs associated with the production of goods, including the costs of raw materials, labor, and overhead directly related to the production process. 

Cannabis businesses can learn to calculate their COGS through IRC 471 to ensure they maximize their cash flow by deducting their direct costs coinciding with producing and acquiring inventory. 

How 280e Influences Cannabis Companies Into IRC 471 

Why optimize your finances and deduct certain costs associated with inventory? IRS 280e Code prohibits you from deducting normal expenses within your cannabis business that other traditional businesses can deduct normally. 

Those of you with a cannabis company, know it’s challenging to not have normal deductions of expenses and costs within the business since there are many fees taxed on the business, in part due to the 280E Internal Revenue Code

To combat the problem, IRC 471 allows cannabis companies to calculate their COGS since that’s what they can deduct. This lowers their taxable income making the business have a healthier financial record, especially in tax season. 

Types Of Cost Of Goods Sold For Cannabis

There are several types of costs of goods sold that different cannabis companies can deduct from the business, but all won’t be the same. We compiled a list of potential COGS for distinct cannabis businesses. 

Cost Of Goods Sold For Dispensaries

Cannabis dispensary cost of goods sold have distinct expenses and costs. Many dispensaries may potentially deduct the COGS listed below. 

These cost of goods sold can include: 

Cost Of Goods Sold For Cultivators

Cultivators have their own set of possible deductions for those of you in the cultivation business. 

These include the following: 

The COGS for cultivators is different for many cannabis cultivation companies since not all have the same costs associated with growing the plant. 

There may be other costs associated with growing the cannabis plant that can be considered COGS for cannabis producers. 

Cost Of Goods Sold For Processing and Manufacturing

The Cost of Goods Sold (COGS) for processing and manufacturing businesses in the cannabis industry includes the direct costs associated with converting raw cannabis material into finished products.

These include the following: 

Cost Of Goods Sold For Testing Laboratories

COGS for testing laboratories in the cannabis industry includes the direct costs associated with conducting tests on cannabis products for potency, contaminants, and quality assurance.

These include: 

Cost Of Goods Sold For Cannabis Distribution

Cannabis distribution COGS are the direct costs associated with the distribution of cannabis products from producers or manufacturers to dispensaries or retailers.

The COGs for cannabis distribution may be: 

These may be the COGS for cannabis companies looking to optimize their financial dollar. 

It’s important to note that certain indirect costs, such as administrative overhead, marketing, and general business expenses, are not included in COGS but are considered part of the overall operating expenses of cannabis businesses. 

How To Conduct Proper Accounting To Optimize COGS 

In conducting proper accounting to optimize your Cost of Goods Sold (COGS), you can do the following: 

These are only a few optimization strategies you can use in navigating COGS for your cannabis business.

When To Hire An Accountant For IRC 471 Cannabis Cost Of Goods Sold? 

You can hire an accountant when your business grows larger. The larger your business grows, the more challenging it may be to calculate IRC 471 cannabis cost of goods sold. 

Cannabis accountants are the best to work with since they specialize in working with cannabis businesses such as Green Space Accounting

We help you with cash flow management, payroll, and identifying accurate cost of goods sold for your business. 

Accounting can be challenging enough if you’re doing it yourself. With an accountant, you save time and a stressful amount of financial work you don’t have to dive through. 

Contact Green Space Accounting to help you with all your financial and accounting tasks.