Recording Cannabis Inventory: From Seed to Sale

Companies operating in the cannabis industry, especially cannabis cultivators, are no strangers to IRS Code Section 280E and its provision that businesses legally cultivating or distributing marijuana products can only deduct costs-of-goods-sold when calculating federally (and some state) taxable income. General and administrative expenses such as salaries, rent, and advertising aren’t deductible.

So, if costs-of-goods-sold is the only category of expense eligible to be deducted, how can businesses ensure they are maximizing their deductions? By accurately recording inventory from seed to sale.

All states that have authorized the production and sale of marijuana, whether for medical or adult use, require the use of seed-to-sale tracking software. The software is mandated by the states to ensure compliance with cannabis laws. While seed-to-sale software enables cannabis businesses to update inventory as it moves from stage to stage and maintains a log of all employees who have handled the inventory at each stage, the software has presented cultivators with challenges, including:

• Accurately recording harvested plants moved to the drying rooms
• Appropriately updating the weight of work-in-process inventory after it has been removed from the drying room and before it has been packaged as a finished good
• Appropriately tracking inventory physically still in work-in-process inventory but moved to “finished goods” in the seed-to sale software prior to packaging
• Producing historical reports

Such challenges can lead to the improper recording of inventory and non-compliance with relevant state regulations. The following procedures can be used to mitigate those risks:

• Save reports from the seed-to-sale system daily.
• Perform cycle counts of all inventories:
  • Once a week for all raw materials
  • Once a week for work in process inventory
  • Three times a week for finished goods
• Keep a physical inventory sheet in each room to be signed by employees as they make updates and a digital copy outside the seed-to-sale software with the same information.
• Reconcile reports from the internal spreadsheets with reports produced by the seed-to-sale system after each internal cycle count is performed.
• In the rooms containing work-in-process inventory, physically separate and label the inventory being regarded as finished goods in the seed-to-sale system.

It is important to remember that while seed-to-sale software helps track inventory, the software is still subject to human error.

The importance of properly recording cannabis inventory should not be underestimated. It is the key to understanding operations and consumer patterns, and correct financial reporting, as well as compliance with regulations.

For additional inquiries or cannabis consultations please contact HBK Cannabis Solutions at 856-486-2299.

Register for the next cannabis webinar on April 8, 2022 here.