Accounting for
CANNABIS KEITH JOHNSON
CPA, PhD, MST, MBA
Times have certainly changed. With evolving cultures, attitudes, and technologies, the cannabis (marijuana) industry has exploded especially over the last 30 years. As a result, Americans’ attitudes, and those of elected legislators have changed with them. In 1996, California voters passed Proposition 215, becoming the first state to allow the use of limited quantities of cannabis for medical purposes. Other states soon followed. Then, in 2012, Colorado voters passed Amendment 64, allowing the state to become the first in the country to allow the use of recreational cannabis. As of late 2023, only six states outlaw use of cannabis in all situations, 24 states and the District of Columbia allow recreational use of cannabis, and 20 others allow cannabis for medical use under a doctor’s care. Despite the increasing acceptance of cannabis, it is still illegal under federal law after the passage of the Marijuana Tax Act of 1937. Marijuana is still a substance subject to federal enforcement and penalties under the Controlled Substance Act of 1970, although enforcement in recent years appears to be more focused on major drug suppliers, both foreign and domestic. This inconsistency in legalization presents a challenge for business owners who would like to take advantage of newly passed state laws, allowing either medical or
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FLORIDA CPA TODAY | WINTER 2024
recreational cannabis use, to grow and sell the product but find that income from cannabis sales, though legal at the state level, may be confiscated due to federal control of banking and income tax enforcement. This means that very careful attention must be paid to the accounting for the cultivation and sale of cannabis. Meticulous records must be kept of all labor, seeds, plants, and resources used to grow and distribute the substance. Incorrect application of costs can lead to potentially devastating tax consequences. To understand cannabis accounting, a practitioner should be familiar with Internal Revenue Code Section 280E. As cannabis is considered a Schedule 1 Controlled Substance under federal statute, Congress in 1982 passed I.R.C. Sec. 280E to prevent drug dealers from deducting General and Administrative (G & A) and selling expenses that would reduce their illegal but still taxable income. 280E came in response to the Tax Court’s 1981 decision in Edmonson v. Commssioner, which allowed taxpayers engaged in illegal activities to deduct certain expenses and to report taxable income. The primary focus of 280E is that only Cost of Goods Sold (COGS) expenses related to
the growth and sale of cannabis may be deducted by the business to determine taxable income. Note that the statute does not explicitly state that conclusion. As a result of 280E, only costs associated with actually producing and handling the cannabis are deductible. One should tell clients: If the cost is not the result of actually coming in contact with the cannabis, it is not deductible. Examples of expenses allowable under 280E include (for growers): Planting Cleaning Trimming Curing Packaging Storage Seedlings