280E Bookkeeping 101: What Every Dispensary Must Track

Running a Cannabis business is tough enough but nothing squeezes profits like 280E. While cannabis is legal in many states, the 280e tax code still treats dispensaries as if they’re trafficking a controlled substance. That means higher federal taxes, tighter margins, and zero deductions for most everyday expenses.

Many operators rely on solid cannabis-focused bookkeeping to stay ahead of these challenges, and resources like our cannabis accounting guide can help you understand what to track from day one.

To stay compliant and stay profitable, operators must understand what is 280E, how it affects cash flow, and which bookkeeping systems actually protect their business. Whether you’re an owner, manager, or accountant, 280e accounting is the only way to defend your COGS, reduce tax exposure, and answer the question every operator asks: How do dispensaries pay federal taxes under 280E without losing their margins?

This guide will cover what to track, how to set up accounts, and which systems to use. It also talks about when to get help from cannabis accountants. Follow these tips to lower risks, increase profits, and show strong financials to investors and regulators.

Key Takeaways

• 280E prevents federal deductions for many business expenses; proper COGS tracking is critical.
• Understand what is 280e and how it shapes tax strategy for dispensaries.
• Move toward accrual accounting to create clean records and clearer margins.
• State rules, like New York’s licensing requirements, add reporting layers to manage.
• Use bookkeeping systems that separate direct production costs from nondeductible expenses under the 280e tax code.

Why Dispensaries Need 280E-Ready Bookkeeping

Dispensaries face a unique tax rule. IRC 280e denies deductions for any business that handles federally controlled substances. This forces you to split all costs into:

• Deductible COGS
• Nondeductible overhead

Good bookkeeping lowers audit risk and proves what belongs in COGS

IRC 280E: What It Is and Why It Matters

IRC 280E stops federal deductions for controlled substance trafficking. State laws like in California or New York don’t change this. Dispensaries must track expenses carefully, proving which are for cost of goods sold and which aren’t.

How 280E Impacts Profit Margins and Taxes

Since most expenses can’t reduce federal taxes, taxable income appears higher. This results in:

• Bigger tax bills
• Tighter margins
• Higher cash taxes

Strong COGS tracking helps protect your bottom line

Why Accrual Accounting Works Best Under 280E

Accrual accounting records income and expenses when they happen, not when cash moves. This method makes inventory value and COGS calculations clearer. For questions like “Does 280E apply to growers?”, accrual records give the full history.

Cash basis can make it hard to justify adding production costs to inventory under IRC rules. Accrual statements help investors and lenders understand operations. They also support positions under the 280e cannabis framework.

What Dispensaries Must Track for 280E Accounting

Inventory tracking must include lot numbers and seed-to-sale IDs. It should also include unit costs and the value of unfinished and finished products. Use accrual accounting to calculate COGS accurately.

Inventory tracking and COGS calculation

Tracking inventory must include lot numbers and seed-to-sale IDs. It also needs unit costs and the value of work-in-progress and finished goods. Use accrual accounting to accurately calculate COGS.

Keep cost layers like FIFO or specific identification. Back adjustments should be supported by invoices and production logs.

Direct production costs and legally defensible allocation methods

Direct production costs include seeds, soil, and direct cultivation labor. Capture timekeeping and material usage linked to lot numbers. When costs are shared, use a documented method to allocate.

Choose allocation rules that are logical and supportable. Record the methodology in policy documents. Consistent application makes 280e accounting more defensible in an audit.

Nondeductible 280E Expenses and How to Track Them

Nondeductible costs include:

• Rent
• Admin wages
• Marketing
• Utilities

Keep these separate from COGS to avoid mixing categories during an audit.

State and Local Tax Differences Under 280E

States handle cannabis taxes differently. Track:

• State excise taxes
• Local cannabis taxes
• State-only deductions

Reconcile state and federal taxable income separately.

Maintain distinct reports for federal filing and each state filing. This meets differing rules in California, New York, New Jersey, Oklahoma, New Mexico, and other jurisdictions.

Bookkeeping Systems and Controls for 280E Compliance

Good bookkeeping starts with a clear chart of accounts and a general ledger structure. It separates COGS from nondeductible costs. Map account codes to tax-report lines for easy 280e filing.

Create sub-ledgers for inventory, direct labor, and materials. This supports clear 280e bookkeeping.

Make posting policies and use consistent naming to avoid mixing things up. Reconcile sub-ledgers to the GL every period. Keep COGS builds to show how costs move from cultivation to cost of goods sold.

POS Integrations for Stronger 280E Accounting

Link the point-of-sale system with inventory and seed-to-sale platforms. This makes product movement and cost flow automatic in accounting records. Daily or weekly POS sales reconciliations catch issues early.

Ensure the POS captures needed fields for state reporting and tax remittance. This keeps 280e compliance.

When to Bring in Cannabis Accounting Experts

Hire cannabis-experienced CPAs when dealing with:

• Complex 280e filings
• Cost allocations
• Audits
• Vertical integration

Experts strengthen compliance and boost credibility with investors.

Key 280E KPIs and Financial Reporting

Track:

• Gross margin
• Effective tax rate
• Cash taxes paid
• Inventory turnover
• Monthly COGS schedules

These help operators understand their real financial position under 280E.

Reconcile POS data to the GL and include these in monthly packs. Clear, consistent reporting reduces risk and supports 280e compliance.

Conclusion

Managing 280e risk is essential every cannabis business .tracking costs accurately, and using strong systems help you stay compliant and protect your margins.

Using reliable POS and seed-to-sale systems is key. They help you keep accurate records. These records are important for audits and tax reports.

Dispensaries face tight margins and strict rules. If you’re using cash basis, switch to accrual accounting. This way, you can track inventory and costs better.

Set up accounts to track direct costs and separate nondeductible items. Also, put in place controls and documentation. This meets state and local rules and makes tax time easier.

Get help from cannabis experts for complex tasks and audits. Good 280e accounting boosts investor trust and helps you grow. It also helps managers make smart decisions about pricing and costs.

In short, strong records, integrated systems, and expert advice make a big difference. They turn a challenge into a financial advantage.

FAQ

What is IRC 280E and why does it matter for dispensaries?

IRC 280E is a federal tax rule that doesn’t let businesses deduct costs for selling controlled substances. This includes cannabis. For dispensaries, it means they can’t deduct many business expenses on their federal taxes. This leads to higher taxable income, tighter margins, and more cash taxes.They also need to keep detailed records to separate deductible costs from those that aren’t allowed.

How does 280E affect profit margins and tax liabilities?

Most business expenses are not deductible under 280E. This means dispensaries have higher taxable income than other businesses. They face lower cash flow, higher taxes, and tighter margins.With limited banking and state taxes, the tax burden is even higher. Keeping accurate COGS and allocations is key to reducing federal taxes.

Why should a cannabis business use accrual accounting instead of cash basis?

Accrual accounting helps track revenues and expenses accurately. It’s essential for calculating COGS and claiming deductions under 280E. Cash basis can misrepresent profitability and lacks the detailed records the IRS wants.For growers and processors, accrual accounting is vital for audits and attracting investors or lenders.

What inventory details must dispensaries track to support COGS under 280E?

Dispensaries need to keep detailed inventory records. This includes lot numbers, seed-to-sale identifiers, and unit costs. They should also track work-in-process and finished goods.Use consistent cost layering and document any inventory changes. These records are critical for claiming deductible production costs.

How should sales be recorded and segmented for 280E purposes?

Record sales by product type, channel, and tax status. Keep POS transaction logs, receipts, and tax collection records. Regularly reconcile POS deposits to bank statements.Segmented sales data helps tie revenue to COGS and supports tax positions.

What costs can legitimately be included in COGS?

Direct production costs like cultivation inputs and direct labor can be included in COGS. Packaging that becomes part of inventory and materials consumed are also deductible. Costs must be directly tied to producing inventory.Shared or indirect costs need defensible allocation methods and thorough documentation to be considered COGS.

Which expenses are nondeductible under 280E and how should they be tracked?

Nondeductible expenses include rent, general administrative wages, and marketing. Keep separate accounts for these categories. Never mix them with COGS accounts.Keep invoices, timecards, contracts, and allocation workpapers to justify the separation if audited.

Do state and local tax rules change 280E’s federal effects?

No, 280E is a federal rule and remains in effect regardless of state legalization. State and local tax rules vary. Excise taxes, retail taxes, and state-level deductions or credits differ by jurisdiction.Track state-specific taxes and reconcile federal taxable income with state taxable income where state law allows different treatment.

How should a chart of accounts be structured for 280E compliance?

The chart of accounts should clearly separate COGS from nondeductible expenses. Create sub-ledgers for inventory valuation, WIP, and production labor. Use consistent account codes for tax reporting.This simplifies reconciliations and audit trails.

What role do POS and seed-to-sale integrations play in 280E bookkeeping?

POS and seed-to-sale integrations automate product movement and cost flow into inventory and COGS. Daily or weekly reconciliations catch discrepancies quickly. These integrations also ensure state reporting data is captured.They make building audit-ready schedules more efficient.

What internal controls and documentation reduce audit risk under 280E?

Segregate duties for purchasing, receiving, and inventory adjustments. Keep vendor invoices, cultivation logs, and timecards. Document allocation methodologies and maintain inventory rollforwards.Prepare audit-ready packs with COGS schedules, reconciliations, and supporting documentation. This reduces risk and speeds up responses to audits.

When should a dispensary hire specialized cannabis accounting or tax advisors?

Hire cannabis-experienced CPAs or tax attorneys for accounting policies, tax returns, and audits. They help implement defensible allocations and tailor systems to the industry.They improve credibility with investors and manage 280E exposure.

Which KPIs and reports should operators track to manage 280E exposure?

Track gross margin, effective tax rate, cash tax paid, and inventory turnover. Use regular P&Ls to separate nondeductible expenses and show COGS build schedules. These reports help with forecasting and investor reporting.

Does 280E apply to growers and processors as well as dispensaries?

Yes, 280E applies to any business trafficking in federally controlled substances. This includes growers, processors, distributors, and vertically integrated cannabis businesses. Each must keep accurate COGS records and separate nondeductible overhead.

What immediate steps should a dispensary take to improve 280E bookkeeping?

Switch to accrual accounting if not already using it. Redesign the chart of accounts to separate COGS from nondeductible expenses. Integrate POS and seed-to-sale systems.Implement segregation of duties and documentation practices. Engage cannabis-specialized accounting or tax advisors for complex allocation and audit defense.