COGS, however, can help to alleviate this tax-centric dilemma. This makes for a very expensive way to run a business. 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. Why is this important for cannabis businesses to know? 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. So costs that went into, for instance, marketing and overhead costs, would not be considered COGS. So literally, the costs that went into the product that is sold.ĬOGS does not, however, include costs that are not directly related to the production or manufacture of the products. A Brief Overview of COGSĬost 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. To learn more about your tax resolution options, call her firm at (916) 299-9913 to schedule a free consultation. Through her tax law firm, she represents cannabis dispensaries in audits, offers in compromise, payroll tax arrears, and installment agreement applications. Jin Kim is a California tax attorney helping cannabis businesses resolve outstanding federal and state tax debt. And that includes making use of Cost of Goods Sold (COGS) adjustments to their gross receipts. 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. As a brief summary, legally operating cannabis businesses are not allowed to claim any credit or deduction to their taxable income even if they are legally operating, like any other regular business, under state law.Īt 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. This reduces the cost of raw materials per unit produced, driving down the overall cost of goods sold and leading to a higher gross profit.Those involved in cannabis businesses are probably already familiar with the much-debated and much-maligned application of the federal government’s IRC 280E on state-sanctioned and legally operating cannabis businesses. If a business purchases a greater portion of raw materials, it may be able to get a better price. If an automotive company wants to increase production of trucks, it will need to purchase more raw materials and increase labor spending.Ĭompanies are often able to produce goods at a lower per-item cost if they make a greater quantity. On the other hand, direct expenses tend to be highly variable. Indirect expenses tend to be fixed costs, which means that they do not increase depending on the number of products or services that a company makes or renders.įor example, a business's rental expense for a production facility will remain the same whether it produces 1,000 items or none.
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