Income Tax Preparation for Cannabis Dispensaries
An Accountant’s Worksheet for Minimizing the Impact of IRC Section 280E
One of the most significant accounting/tax issues facing medical cannabis dispensaries is Internal
Revenue Code Section 280E, (IRC 280E) which was created to deny valid business deductions to anyone
“trafficking” in a controlled substance. Until it gets repealed, all dispensaries should treat some portion
of their expenses as non-deductible. This worksheet will help you calculate this adjustment. In our
opinion, only the actual financial portion of a transaction should be considered as “traffickin;”
therefore, this worksheet is designed to calculate the portion of all expenses that is attributable to
completing only the financial portion of the transaction when the patient either swipes & signs for credit
card transactions or counts currency for currency transactions. This tax planning tool has not yet been
litigated; please consult your tax advisor.
Step 1: Consider IRC Section 263A
Because under 280E the cost of goods sold is always treated as fully deductible, the first step is to treat
as much of the taxpayer’s expenses as possible as COGS. Full absorption inventory accounting according
to generally accepted accounting principles is a beginning step, but the UNICAP rules under IRC Section
263A can be used to expand the costs which must be considered as COGS. . All tax preparers should
become acquainted with IRC Section 263A. For instance, the IRS instructions shows that the typical
costs generally associated with cannablis dispensaries which should notbe capitalized under these rules
are: selling costs, distribution costs, Section 179 costs, on site storage costs and income taxes. For
dispensaries with gross receipts of $10 million or less, dispensaries should consult with their tax advisors
on how their ability to use IRC 263A change in method of accounting or by electing it on the initial tax
return. The goal is to move as many expenses as possible “above the line” making all of these expenses
fully deductible and not subject to the allocation below. All of the allocation calculations of below-theline costs described below should exclude all 263A costs from both the numerators and the
denominators because such costs are above-the-line. This may complicate some of the calculations
below, and therefore only be performed by a qualified accountant.
Step2: Calculate Portion of Payroll Costs devoted to Sales
Gross W-2 Wages of only Budtenders
(Personnel who work behind the retail counter counseling with patients)
Total Gross W-2 Wages for All Personnel*
Divide Numerator by Denominator to get Retail-Payroll-Fraction
Total Payroll Costs*
(Including wages, payroll taxes, retirement & health benefits, etc.)
Multiply Retail-Payroll-Fraction by Total Payroll Costs
*Exclude any costs included in 263A
___________________
___________________
________ %
___________________
___________________
Step 3: Calculate Portion of Occupancy Costs devoted to Sales
Take a tape measure and measure the square footage of the retail counter area. Each store will have a
different configuration, so use your judgment.
Square Footage of Retail Counter Space
_________________
Total Square Footage for the Entire Facility*
_________________
Divide Numerator by Denominator to get Retail-Occupancy-Fraction
Total Occupancy Costs*
(Including rent, insurance, utilities, depreciation, repair & maintenance, etc.)
Multiply Retail-Occupancy-Fraction by Total Occupancy Costs
________%
_________________
_________________
Step 4: Apply “Transactional Factor”
Take two stop watches and use a sample of 10 to 20 patient visits. Using this sample, the goal is to
calculate the percentage of the total patient-counter-visit time that is attributable solely to the time it
takes to complete only the financial aspects of the transaction. Start the First Stop Watch when the
prior patient leaves the counter, making room for the patient being used in the sample, and stop this
watch when the sample patient leaves the counter (note that this represents the total Patient Visit
Time, including Budtender wait time). Start the Second Stop Watch when the sample patient pulls
his/her credit card or currency from wallet or pocket, and stop this watch when the sample patient
either signs the credit card receipt or completes counting their currency change (note that this
represents only the Financial Transaction Time).
Total of Sample Financial Transaction Time (Second Stop Watch)
_________________
Total of Sample Patient Visit Time (First Stop Watch)
_________________
Divide Numerator by Denominator to get Transactional Factor
_______%
Result from Step 2 – Sales Payroll Costs
_________________
Result from Step 3 – Sales Occupancy Costs
_________________
Sum of the above two, Total Sales Payroll & Occupancy Costs
_________________
Multiply by the Transactional Factor (4 lines above)
_______%
Section 280E Adjustment
_________________
There are other methods to calculate the 280E adjustment based on various allocation of cost methods,
but the above is presented as a guideline for practioners.