24 Aug Using A Management Company to Minimize IRS 280E Tax Consequences
For a dispensary or stand alone cannabis enterprise, IRS 280E is a sure path to closing your doors. Can it be minimized? Of course – if you’re diligent in record keeping and tactical strategy. One caveat – this is tax planning – not tax avoidance. There are ways to *increase your cost of goods sold* (the only legitimate deduction for dispensaries under IRS 280E) utilizing a shadow management company. In this series of posts, I’ll detail some that are extracts from my next book, “Solving IRS 280E Issues for Cannabis Enterprises”. Look for it shortly at my web site, www.marijuanabusinessoperations.com.
Dispensaries buy their flower, edibles, and ancillary products from other producers, who generally ship directly to the dispensary. The cost of goods sold (“COGS”) includes this transportation, which is not marked up but rather included in the COGS, which is the only deduction for business expenses allowed for the dispensary. The dispensary should create a shadow management company, with a separate address and set of books.
The dispensary should direct the vendors supplying all of the resale items to ship to the management company. The management company should inspect the product, create inventory count sheets, and add intrinsic value to their efforts which they can in turn charge the dispensary for. This charge can now be added to the COGS of the inventory, thereby raising the costs, and reducing tax exposure. For example, if the management company has a contract with the dispensary to accept, repackage and then ship/transport the inventory to the dispensary, it has a legitimate reason to bill them. Let’s assume that the contract is an annual one for $35,000. The dispensary now has inventory that has increased its COGS by $35,000, reducing the tax bite, and yet still throwing off cash to the management company which is then taxed at a much lower rate. Win-win for both entities, as the tax bite has been reduced, and the cash goes to the owners.