Charitable Deduction – Cannabis

Charitable Deduction – Cannabis

Charitable Deduction – Cannabis businesses should consider the implications of California transition rules which tax effect on July 1 with additional requirements for testing, packaging and labeling products. If inventory can no longer be sold, there are a number of strategies that

Charitable Deduction - Cannabis

should be considered. The rest of this post will highlight the general rules for claiming either a loss or charitable deduction in connection with the disposition of cannabis that can no longer be sold at retail.

CAUTION – We researched the issue, but were unable to find any authority which addressed:

  • Restrictions on the deductibility of an actual donation of cannabis [literally the plants] to a charitable organization.
  • There is no authority relative to IRC Sec. 280E disallowing charitable contribution.

If anyone is aware of authority which would limit the deduction, please let us know immediately. 

  • If plant inventory is destroyed or sold, the cost of the plants becomes part of Cost of Goods Sold, so there is no disallowance of the deduction under IRC Sec. 280E.

Charitable Donation

Sometimes you can get a larger deduction from distressed inventory by donating it to a tax-exempt charity. If a charity puts the distressed inventory to its intended use or to care for the ill, the needy or infants, the donating business might be able to deduct the fair market value of the inventory as a charitable donation. The deduction is limited to the lesser of the fair market value reduced by half the gain that would be recognized if it were sold or twice the tax basis in the inventory.

Companies looking to reduce inventory and take a tax deduction may donate obsolete inventory to a charitable cause. An agreement is made between the charity and you, saying the items were donated at no cost to the charity. You may deduct the fair market value for the inventory from your taxes following the donation. Inventory receipts signed by the charity and your business will document the transaction.

Charitable Deduction – Cannabis

Bona Fide Sales

A bona fide sale is simply selling the item to a salvage yard or liquidator. In these cases, the tax deduction is the fair market value minus what you recover for the item. If you sell obsolete inventory to a liquidator for $100, and the inventory has a market value of $1000 at the time of the sale, you have a $900 deduction for the sale. For it to be considered a bona fide sale, you cannot have any interest or rights to the property. To qualify for a bona fide sale deduction, it cannot be consigned to another seller.

Destruction of Inventory

You can get a tax deduction for obsolete inventory by destroying it.This is typically a last resort, as the tax savings are minimal. The IRS requires photographs before and after the destruction of the inventory to verify it has been destroyed. Additional documentation includes the market value of the item and the inventory purchase order. Destroying inventory may reduce property tax in certain states, and the IRS allows a minimal deduction of the value of the items.

Markdown and Clearance Sale

You can sell the products in a clearance or markdown sale, as an attempt to clear out inventory. This does not offer any tax breaks under the IRS. Instead, you would be able to record the sale as a business transaction. As long as the product sells for cost, the business can save money on storage fees and inventory calculations. If the product sells for less-than-cost, depending on the amount of loss, certain IRS tax deductions and credits may apply.

Charitable Deduction – Cannabis

Treasury regulation 1.471-2 allows businesses to deduct the drop in their inventories’ value if the inventory can’t be sold at normal prices or can’t be used “in the normal way.” Inventory is normally recorded at cost, but when it becomes distressed, the business can revalue it at its selling price minus the direct costs of disposal. The deduction is equal to the difference between the inventory’s historical cost and its distressed valuation.

GAAP Accounting Rules for Inventory Write-Downs

once you have identified inventory that you cannot sell, you must write this inventory off as an expense. Assuming no receipt of payment for the inventory, you will debit a cost of goods sold account and credit either inventory directly or your inventory reserve account. GAAP requires that all obsolete inventory be written off at the time it’s determined obsolete. Therefore, if a company is not regularly reviewing their inventory for obsolescence they could have a large hit to their bottom line. While the process of writing off inventory for GAAP purposes is rather straightforward, being able to get the tax deduction is not quite as direct.

We add a side, note to a very interesting article.

The CA Regulations Requiring Destruction of the Sacred Plant on July 1, 2018, Provides an Opportunity for Extraordinary Acts of Compassion Before July 1, 2018

Author: abizcannabis

Managing Director & CEO of integrated transactional financial advisory, tax, and technology consulting firm - aBIZinaBOX Inc New York, Chicago, and OaklandCPA.CITP.CISM.CGEIT.CGMAExpertise with: Alt. Investments/Private Equity, Real Estate, Professional Services, CA Cannabis, Tech Start-Ups and Distressed Assets/DebtTechnology Certifications including:Advanced & High Complexity Cloud Integrator AICPA PCPS, CAQ,, IMTA, CITP ISACA CGEIT, CISMState CPA Societies in California, Florida, Illinois, New York and TexasExpertise with Regulatory Compliance - US - HIPAA, FINRA, SEC Rule 17(a)(3)/(4), eDiscovery, FINCEN - EU- EBA, ESMA, EIOPA UK - BoE, PRA, FCA