Love Thy Transport: Hidden COGS of Moving Cannabis
In the cannabis industry, every dollar spent on inventory needs to be carefully accounted for—especially when it comes to allocatable Cost of Goods Sold (COGS). One often-overlooked but significant factor in cannabis financials? Transportation costs
Why Transport Matters in Cannabis COGS
Unlike traditional industries, cannabis businesses operate under strict tax codes that limit deductions. For those following 471.11, expenses directly related to acquiring and producing inventory—including transportation—must be included in COGS allocation. This applies to cultivators and processors who are required to track all costs tied to the production process, including inbound freight and facility transfers.
But what about dispensaries? While they typically have fewer deductible expenses, IRC 471.2 offers some relief. This code allows retailers to capitalize certain inventory-related costs—including transport—when properly supported. By carefully documenting freight and delivery expenses associated with inventory procurement, dispensaries can strengthen their COGS allocation under 471.2, ensuring compliance while improving their tax position.
Breaking Down Allocatable Transport Costs
So, what transportation expenses can be allocated to COGS?
Inbound Freight: The cost of transporting raw materials (like seeds, clones, soil, or nutrients) to your cultivation facility. Applies under471.11 for cultivators and under 471.2 for dispensaries when directly tied to inventory acquisition.
Interfacility Transfers: Moving cannabis from a grow operation to a processing center or from processing to a dispensary is allocatable under 471.11.
Direct Distribution Costs: If you’re paying for delivery services or transport personnel, these costs can be assigned to inventory under 471.11 for producers and potentially under 471.2 for dispensaries when properly documented.
Fuel & Vehicle Costs: If you own and operate your own fleet for cannabis transport, a portion of vehicle expenses may be allocatable as part of inventory costs.
Maximizing Your Tax Position
Many cannabis operators fail to account for transport costs correctly, leaving money on the table when it comes to tax time. A proper COGS allocation strategy can legally reduce taxable income, making an already high-cost industry slightly more profitable.
To make sure you're allocating transportation costs properly:
✔ Track all transport invoices and expenses—don’t lump them into general operating costs.
✔ Classify transport expenses correctly in your chart of accounts to ensure they are assigned to inventory costs.
✔ Work with a cannabis accountant (like me!) to ensure compliance with 471.11 for cultivators/processors and 471.2 for dispensaries, maximizing tax advantages while staying compliant.
Conclusion
Love thy transport, because it directly affects your bottom line. Ignoring these costs—or worse, not paying them—means losing out on tax benefits you’re entitled to. With the right strategy, you can turn unavoidable transportation expenses into a smart financial advantage.
If you're unsure whether your transport costs are being allocated correctly, let's talk. Getting it right today means more savings tomorrow. Don’t gamble with your business’s future—work with an accountant who understands the intricacies of state and federal compliance. Let’s talk about how to keep your dispensary or cultivation operation legally secure and financially sound. Book a consultation today!
