The Scoop on Processing
As the cannabis industry continues to expand in Mississippi, licensed cannabis processors are stepping into a complex world of regulatory and financial compliance. From meeting Department of Health standards to navigating IRS codes like Section 280E, processors need to balance innovation with accountability.
Here’s what every Mississippi cannabis processor should keep in mind going into 2025:
Understand Your License and Operational Boundaries
Per Mississippi Department of Health regulations (Part 22, Subpart 6), cannabis processors must maintain rigorous standards in facility security, batch tracking, labeling, and quality control. Whether you’re a processor or micro-processor, each batch must be traceable and meet defined specifications for consistency, identity, and strength.
Keep detailed logs for every “batch,” and ensure each product is tested per state-mandated analytical standards before entering the supply chain.
Apply Full Absorption Inventory Accounting (IRC § 471-11)
Under IRC Section 471-11, cannabis processors classified as manufacturers must use the full absorption method for inventory accounting. This means:
You must capitalize both direct and indirect production costs into your inventory.
You cannot expense things like utilities, rent on processing space, or wages of production staff immediately—they must be allocated into the cost of goods sold (COGS).
This method aligns with GAAP and is critical for clear income reflection—particularly under IRS scrutiny.
Stay Mindful of IRC § 280E Limitations
While Mississippi law permits medical cannabis processing, federal law still classifies cannabis as a Schedule I substance, making your business subject to IRC § 280E. This section disallows deductions or credits for any business expenses beyond cost of goods sold (COGS) if you're “trafficking” a controlled substance.
What you can’t deduct:
Rent (non-production)
Marketing
Payroll for admin and sales staff
Legal and accounting fees
What you can include in COGS (with proper documentation):
Raw materials
Packaging
Direct labor in production
Equipment depreciation (if directly tied to production)
Build an Audit-Ready Documentation Trail
To survive a federal or state audit, processors must maintain:
Inventory flow records under IRC § 471 and Rev. Rul. 2001-8
Payroll and fringe benefit logs per IRS Pubs 15 & 15-B
Accurate accounting periods and methods, ideally documented in compliance with IRS Pub 538
You should also file your Form 4562 for depreciation of eligible processing equipment and clearly distinguish it from disallowed 280E deductions.
Consult a Cannabis-Savvy Accountant
Navigating these waters without specialized guidance is risky. Work with an Accountant who understands:
Cannabis-specific compliance (both federal and MS-specific)
Tax-efficient entity structuring
State reporting obligations under Mississippi’s Cannabis Processing regulations
Conclusion
The cannabis processing business in Mississippi is rewarding but requires discipline in accounting and compliance. With the IRS watching closely and Section 280E still in full force, processors must make smart financial moves—starting with bulletproof bookkeeping and proactive tax strategy.
If you’re processing cannabis in the Magnolia State, your numbers need to be as clean as your product.
