Story by Cynthia L. Finkenbinder, CPA
Last month we talked about building out your facility—well now that it is built, what about all the stuff you need to purchase to make the building be productive and work for you? I am talking about the stuff you put in it. You know, the equipment needed to actually run your business.
Let’s start with a grow facility, because most if not all of what you will find here will comply with 280E. This would include things like the lighting, the pots and soil to grow the plants in, the water lines, and gardening tools. All of these would be depreciable, however that depreciation is attributed to the actual product, and therefore, the depreciation would be part of your cost of goods sold, making the depreciation subject in compliance with 280E.
Now, we look at the product manufacturing side—this is where you would be making edibles, tinctures and other infused products. Again, most if not all your equipment will be deductible for 280E compliance. This type of equipment can be much more expensive than the equipment used for a grow facility or the dispensary. Extraction equipment alone can easily take up half your budget or more. This equipment would normally be depreciated over a seven year period. Keep in mind that equipment does not include what would be considered supplies, such as baking pans or mixing bowls—these normally have to be replaced on a regular basis to maintain quality, so they are not depreciated because they are considered supplies instead of equipment.
Okay, now for the dispensary. This is the area of cannabis operations that the federal government considers trafficking—which the DEA still considers a no-no—so most of the equipment could not be deducted under 280E. This equipment is things such as display cabinets, refrigerators and product shelves. This is where you must be diligent in your design: If you have paraphernalia such as T-shirts, bowls, or even empty vape pens, but don’t designate which display cases those items will be in or create a specific display area for them, you need to consider the depreciation for those kind of product displays as all non-deductible under 280E. Smart planning is the key. If you design your facility with an area that is only for displaying and selling non-cannabis items, then that area would be considered “cost of goods” and written off. This takes a lot of thought when setting up shop, which means when you work with an architect or designer early on, you’ll need to make sure you have areas designated for different products and ensure that they are separated from each other.
What about the other equipment that is used throughout the facility? Things such as computers, security cameras, safes, cash registers, etc. Let’s start with the computers. Generally these are may not be deducted under 280E, with one exception. If it is only to run the security system and has no other function or other software, then it may be compliant. The security system has to be apportioned according to which area it is securing. If it is only the grow facility or the manufacturing area, then it may be deducted under 280E. All other areas it will not be. However, you can apportion the security system based on the number of cameras or the square footage of the facility – so if you have 20 cameras and half of them are in the grow area then half of the security system would be 280E compliant, but if you have a 2000 square foot facility and only 40% is the grow area it would be 40% so in that case you would go from the number of cameras to the percentage that they cover the facility. The idea is to get as much of the equipment as possible to be deductible under 280E.
Finally, there is the equipment that is essential to the cannabis industry, such as safes and armored trucks. If you designate one safe for only raw materials, flower or plants then the cost of that safe could be deducted under 280E. But if you also keep cash in the same safe, then you have to go by the percentage of its use. It would be the same for an armored vehicle, but instead, you would allocate it by the amount of time spent transporting plants as opposed to cash.
Every business has its challenges when it comes to equipment. The key for a cannabis business is to determine what area of the facility it will be in, and whether it may be deducted under 280E. Once that is done, the accounting is simplified, because it will be the same every time that equipment is replaced, but it will also help in determining how to handle ongoing maintenance and repairs of that equipment.
Unfortunately, since the DEA has decided for now, not to reschedule cannabis, we will need to be diligent on 280E compliance for the foreseeable future. Perhaps the incoming administration will change things, but until then, we are still going to be calculating what is compliant and what is not, a while longer.
Cynthia L. Finkenbinder, CPA is the owner of Alpha Omega Accounting, LLC in located in Northern Colorado. With clients in 21 states and three countries, she is an expert in 280E compliance, accounting and multi-state taxes. If you have any questions on this article, would like her to address a question here in an upcoming article, or need professional adviceto make sense of the 280E regulations, you can contact her at firstname.lastname@example.org or visit her website: http://alphaomega-acct.biz