Cannabis Business Was a Reseller, Not a Producer, Thus Limiting Costs That Could Be Treated as Costs of Goods Sold
For a cannabis business, it is important to understand if the business is considered a producer, reseller or perhaps a bit of both, since that impacts the calculation of the one thing that such a business can deduct under the restrictions of IRC §280E—cost of goods sold. In the case of Richmond Patients Group v. Commissioner, TC Memo 2020-52[1] the taxpayer attempted to argue it was a producer based on the actions it took. The taxpayer’s position was rejected by the Tax Court.
The issue presents an “Alice in Wonderland” world for many tax professionals—generally a business wants to avoid having costs classified as items that have to be treated as part of cost of goods sold, since such costs are held in inventory until the product is sold. But since §280E bars a deduction for any items except costs of good sold, a cannabis business generally wants to capitalize into inventory as much as the business can.
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