280E Tax Planning and Compliance

How the Disallowance Works in Practice

Under 280E, selling, general, and administrative expenses are disallowed for federal income tax purposes while costs properly capitalized into inventory under the applicable inventory rules remain recoverable through cost of goods sold. The distinction is an accounting question long before it is a tax question, which is why the ledger structure matters more than year-end adjustments.

• Separation of production costs from selling and administrative costs
• Inventory costing policy documented and applied consistently
• Departmental coding at the transaction level, not in a spreadsheet at year end
• Support for allocations of shared payroll, rent, and utilities

Cost Allocation and Inventory Methodology

Cultivators, processors, and retailers each capitalize a different mix of costs, and the allocation basis has to reflect how the operation actually runs. We document square footage, labor hour, and unit-of-production allocations so the methodology can be explained the same way twice.

New York Regulatory Context

New York licensees operate under the Office of Cannabis Management and report inventory movement through the state's electronic seed-to-sale tracking system. Because state filings, license reporting, and the federal return all draw on the same underlying records, reconciling them continuously reduces the risk of inconsistent numbers across filings. State income tax treatment generally begins with federal taxable income, so 280E effects can carry into state calculations; the current treatment should be confirmed for your entity type each filing season.

Documentation and Audit Readiness

Positions that cannot be reconstructed are difficult to defend. We maintain workpapers tying the return to the trial balance, the trial balance to the subledgers, and the subledgers to production and point-of-sale records.

• Monthly reconciliations retained with supporting schedules
• Allocation workpapers with the underlying measurement data
• Standing document index so records can be produced on request