Question 1

What is IRC Section 280E and why does it matter for my Colorado dispensary or grow?

Accepted Answer

Section 280E of the Internal Revenue Code denies ordinary business deductions to any trade or business trafficking in a Schedule I or II controlled substance, which under federal law still includes marijuana even though it is legal for retail and medical sale under Colorado's Retail and Medical Marijuana Codes. Because 280E disallows deductions like rent, wages for non-production staff, marketing and most overhead, a plant-touching MED licensee can owe federal income tax on a number far higher than its true economic profit. Only cost of goods sold under IRC Section 471 is generally deductible, which is why accurate, defensible COGS accounting is the single most important tax strategy for Colorado cultivators, manufacturers and retail stores.

Question 2

Can a Colorado cannabis business avoid 280E entirely?

Accepted Answer

No plant-touching license — Retail Marijuana Store, Medical Marijuana Center, Cultivation Facility, Infused Products Manufacturer, Testing Facility or Hospitality license — can escape 280E under current federal law, regardless of Colorado's own licensing framework. What we can do is build a defensible cost accounting methodology that captures every dollar properly allocable to inventory production so your taxable income reflects true COGS rather than an inflated figure caused by under-allocated costs. Non-plant-touching entities, such as a separately organized management or real estate company that does not take title to marijuana or marijuana product, are not subject to 280E and can deduct ordinary expenses, which is why entity structure is a core part of our planning work.

Question 3

How does inventory costing help reduce the impact of 280E?

Accepted Answer

Section 471 and the related Treasury regulations allow cultivators and manufacturers to capitalize a broader set of production costs into inventory than a purely federal-tax-minded retailer might expect, including certain indirect costs like facility depreciation, utilities, cultivation labor, quality assurance testing fees and packaging directly tied to production. For Retail and Medical Marijuana Stores, COGS is generally limited to the invoice cost of purchased inventory plus transportation-in, which is narrower than what a Cultivation Facility or Infused Products Manufacturer can capitalize. We build a full standard-costing or actual-costing model tied to your METRC production batches so every allowable cost lands in COGS instead of being stranded as a non-deductible operating expense.

Question 4

Does Colorado's income tax follow the same 280E restrictions as the IRS?

Accepted Answer

No. Colorado's General Assembly enacted a state-level subtraction that allows licensed marijuana businesses to deduct, for Colorado income tax purposes, business expenses that are otherwise disallowed federally under Section 280E. That means your Colorado taxable income starts from federal taxable income and then subtracts the 280E-disallowed expenses that a normal business would have deducted, materially lowering your state income tax liability compared to your federal bill. Claiming this subtraction correctly requires clean records reconciling your federal 280E addback to the expenses eligible for the Colorado subtraction, which we prepare as part of every return we file for MED licensees.

Question 5

What records do I need to defend my COGS allocation if the IRS challenges it?

Accepted Answer

You need a written costing methodology, general ledger detail that maps to that methodology, labor time studies or job-costing records tying employee hours to production versus non-production activities, and production reports from METRC that corroborate the units and costs being capitalized. We build this documentation contemporaneously rather than reconstructing it after an audit notice arrives, because the IRS's cannabis-focused examination teams routinely request this exact support and inconsistent or after-the-fact records are the single biggest driver of adjustments in 280E audits.

Question 6

How does Colorado's retail marijuana excise tax work?

Accepted Answer

Colorado imposes a 15% excise tax on the first transfer of unprocessed retail marijuana from a Cultivation Facility to another licensee, calculated on the Average Market Rate published quarterly by the Colorado Department of Revenue rather than on the actual sale price when the transfer is between affiliated licensees. If you operate a vertically integrated business, we track the applicable AMR category by product type, file the excise return on time, and make sure the tax is remitted at the correct point in the supply chain so it is not accidentally duplicated or missed on transfers between commonly owned Cultivation and Retail Store licenses.

Question 7

What is the difference between the retail marijuana sales tax and the state sales tax on medical marijuana?

Accepted Answer

Retail marijuana sold to adult-use customers is subject to a 15% state retail marijuana sales tax in addition to any applicable local marijuana taxes, while medical marijuana sold to registered patients is instead subject to Colorado's standard 2.9% state sales tax. Because most Retail and Medical Marijuana Codes licensees serve only one customer type per license, we set up point-of-sale and general ledger coding that automatically separates retail versus medical transactions so the correct tax rate is captured at the register and reconciled on your DR 0100 and marijuana tax returns without manual rework at month-end.

Question 8

Do cities like Denver add their own marijuana taxes on top of state tax?

Accepted Answer

Yes. Many Colorado municipalities, including Denver, levy additional local marijuana sales taxes on top of the state's 15% retail marijuana sales tax and 2.9% medical sales tax, and rates and rules vary by jurisdiction across markets such as Colorado Springs, Aurora, Boulder, Fort Collins, Pueblo and Longmont. We maintain a current rate matrix for every jurisdiction our clients operate in, configure your POS system's tax tables accordingly, and reconcile local remittances separately from state filings so a rate change in one city doesn't cause an underpayment across your whole retail footprint.

Question 9

How is Colorado state income tax calculated for a cannabis business, and what deductions matter most?

Accepted Answer

Colorado applies its flat state income tax rate to Colorado taxable income, which is derived from federal taxable income with Colorado-specific additions and subtractions, most notably the subtraction for expenses disallowed federally under Section 280E. Because the starting point is your federal 280E-limited taxable income, the accuracy of your federal COGS methodology directly affects your Colorado state tax base as well, so we coordinate federal and state return preparation together rather than treating the state subtraction as an afterthought.

Question 10

What sales and excise filing deadlines should a Colorado license holder track?

Accepted Answer

MED licensees generally file Colorado retail marijuana sales tax and, for cultivators, retail marijuana excise tax returns on a periodic schedule set by the Department of Revenue based on filing frequency and sales volume, typically monthly with returns due by the 20th of the following month, alongside any local marijuana tax filings your municipality requires on its own calendar. We maintain a master compliance calendar across state DR filings, local marijuana tax returns, METRC reporting and standard payroll and franchise obligations so nothing slips between overlapping deadlines.

Question 11

Why do cannabis businesses need specialized bookkeeping instead of standard small-business bookkeeping?

Accepted Answer

Standard bookkeeping built for a typical retail or service business doesn't separate costs the way 280E and Section 471 require, doesn't reconcile cash and card sales against METRC-reported movement, and often mixes plant-touching and non-plant-touching activity into one chart of accounts. Cannabis-specific bookkeeping builds a chart of accounts organized around inventoriable versus non-inventoriable costs from day one, reconciles daily against your point-of-sale and seed-to-sale data, and produces monthly financials that already reflect your defensible COGS position instead of requiring a costly year-end reclassification project.

Question 12

How do you handle the fact that most cannabis businesses operate largely in cash?

Accepted Answer

We implement daily cash-count and deposit procedures reconciled against POS z-reports and METRC sales data, maintain segregation of duties over cash handling, and document the chain of custody for cash from register to vault to armored transport or bank deposit. Because federal banking access remains limited for many Colorado operators even with state-chartered credit union relationships, tight cash controls aren't just good practice — they're what protects you in a state MED audit, a bank's ongoing due diligence review, and a federal tax examination all at once.

Question 13

Can you help set up or clean up QuickBooks for a multi-license cannabis operation?

Accepted Answer

Yes. We design a class- and location-tracked QuickBooks Online environment that separates each license — whether a Retail Marijuana Store, Cultivation Facility, Infused Products Manufacturer or Transporter — into its own reporting segment while still rolling up to consolidated financials for ownership. For businesses with existing books that have drifted out of sync with METRC and bank activity, we perform a structured cleanup: rebuilding the chart of accounts around 280E-driven COGS categories, correcting historical miscodings, and reconciling every account back to source documents before handing you a clean, audit-ready file.

Question 14

What financial reports should a Colorado MED licensee review every month?

Accepted Answer

At minimum, we recommend a departmentalized profit and loss statement separating COGS from period expenses, a balance sheet with inventory reconciled to METRC, a cash flow statement given the industry's limited access to credit, and a 280E tax accrual schedule showing your projected federal and Colorado tax liability based on current-year activity. Reviewing these monthly rather than waiting for year-end lets you catch a costing error or margin slide before it becomes a surprise tax bill or a cash crunch.

Question 15

Do you offer fractional CFO or controller-level support beyond bookkeeping?

Accepted Answer

Yes. Many of our Colorado clients engage us for fractional CFO advisory covering cash flow forecasting, pricing and margin analysis by product category, capital budgeting for a new Cultivation Facility or dispensary buildout, and lender or investor reporting packages. This sits on top of our bookkeeping and tax work so the same team that closes your books each month is also the team helping you decide whether to open a second Retail Marijuana Store location or add manufacturing capacity.

Question 16

What is METRC and how does it affect our accounting?

Accepted Answer

METRC is Colorado's mandatory seed-to-sale tracking system, requiring every plant, package and sale to be tagged and reported to the Marijuana Enforcement Division from cultivation through final retail transfer. Because METRC captures quantities and movement but not cost information, we build a parallel costing layer that attaches your actual production and acquisition costs to each METRC package ID, so your financial inventory reconciles unit-for-unit with your regulatory inventory rather than existing as two disconnected systems.

Question 17

How often should METRC data be reconciled against our accounting records?

Accepted Answer

We recommend reconciling METRC package and sales data against your point-of-sale and general ledger inventory at least monthly, and weekly for higher-volume Cultivation Facilities and multi-store retail operations. Frequent reconciliation catches tagging errors, unrecorded waste or destruction events, and timing differences between physical movement and system entry before they compound into a discrepancy that draws MED or IRS scrutiny during an audit.

Question 18

How should we account for plant waste, product destruction and shrinkage under Colorado's rules?

Accepted Answer

The MED requires documented, witnessed destruction of waste and non-compliant product with corresponding METRC entries, and those same records need to flow into your accounting system to properly write down inventory and support the resulting cost adjustment for tax purposes. We set up a standard destruction-documentation packet — MED-required forms, METRC confirmation, and a journal entry template — so every write-off is both regulatorily compliant and supportable if the IRS questions a COGS reduction during examination.

Question 19

What inventory costing method works best for a Colorado cultivation and manufacturing operation?

Accepted Answer

Most of our Cultivation Facility and Infused Products Manufacturer clients use a standard costing approach tied to METRC harvest batches and manufacturing runs, which lets us assign labor, materials and applicable overhead consistently across a crop cycle or production batch and then true up to actual costs at period-end. This approach produces more stable monthly margins than pure actual costing while still generating the batch-level audit trail examiners expect to see connecting a METRC harvest lot to a specific COGS figure on your tax return.

Question 20

What happens to our books if METRC flags a discrepancy or a package goes missing?

Accepted Answer

A METRC discrepancy typically triggers an inquiry from the Marijuana Enforcement Division and, left unresolved, can jeopardize your license standing, so we treat any flagged variance as an immediate priority — reconciling the underlying transaction history, documenting the resolution, and adjusting inventory and COGS in your books to match the corrected METRC record. Keeping accounting and METRC permanently in sync is the best defense against both a MED compliance action and a federal inventory-valuation challenge down the road.

Question 21

What triggers an IRS audit for a Colorado cannabis business?

Accepted Answer

IRS examination teams have historically focused significant attention on Schedule I trafficking businesses, and common triggers include reported gross margins that appear inconsistent with industry norms, COGS deductions that grow unusually large relative to revenue, cash-intensive operations with limited banking documentation, and simple statistical selection given the industry's compliance history. We prepare every return assuming it may be examined, with a documented costing methodology and reconciled supporting workpapers ready to hand over rather than assembled after a notice arrives.

Question 22

How should we prepare for a Marijuana Enforcement Division compliance inspection or audit?

Accepted Answer

MED inspections review license posting, security and video retention, product tracking and labeling, and METRC accuracy against physical inventory, so preparation means keeping your standard operating procedures current, your METRC records reconciled in real time, and your financial and inventory documentation organized enough to answer an inspector's questions on the spot. We support clients by maintaining the accounting side of that readiness — reconciled inventory, documented destruction and transfer records, and clean books that corroborate what your operations team shows the inspector.

Question 23

What should I do if I receive an IRS notice or examination letter?

Accepted Answer

Don't respond or send documents before your accountant has reviewed the notice, confirmed the scope of what's being requested, and organized your position — early, informal responses to an examiner are one of the most common ways cannabis businesses inadvertently expand the audit's scope. Contact us immediately at (720) 730-6673 or advisory@coloradocannabiscpa.com so we can review the notice, coordinate with tax counsel if needed, and manage the document production and examiner communication on your behalf.

Question 24

Can bookkeeping mistakes jeopardize our MED license, not just our tax return?

Accepted Answer

Yes. Inventory discrepancies traceable to sloppy bookkeeping can surface during a MED audit as unexplained METRC variances, which can lead to fines or, in serious or repeated cases, license actions against your Retail Marijuana Store, Cultivation Facility or Infused Products Manufacturer license. Because financial recordkeeping and regulatory compliance are intertwined in this industry, we treat accounting accuracy as a license-protection function, not just a tax-preparation function.

Question 25

How long should we retain cannabis business financial and compliance records?

Accepted Answer

We recommend retaining full financial records, METRC reports, destruction documentation and tax workpapers for at least seven years given the IRS's extended statute of limitations exposure on unreported income issues and the MED's own recordkeeping expectations, and longer for any records tied to a license application, ownership change or entity formation. We maintain digital archives for our ongoing clients so historical records are always retrievable if an examiner or the MED requests a prior-year file.

Question 26

Do you work only with plant-touching MED licensees, or also ancillary cannabis businesses?

Accepted Answer

We work with the full range of Colorado cannabis operators — Retail and Medical Marijuana Stores, Cultivation Facilities, Infused Products Manufacturers, Transporters, Testing Facilities, Hospitality licensees and Accelerator program participants — as well as ancillary businesses like real estate holding companies, management companies and equipment lessors that serve the plant-touching side of the industry without triggering 280E themselves. Because we understand how these entity types interact, we can help you structure new ventures the right way from formation instead of untangling a problematic structure later.

Question 27

How is your pricing structured, and is there a minimum engagement?

Accepted Answer

We scope engagements around your license count, transaction volume and whether you need bookkeeping, tax, or fractional CFO support (or all three), and we quote a fixed monthly or annual fee after an initial review of your books and operations rather than billing unpredictable hourly rates. There's no rigid minimum, but most active MED licensees find ongoing monthly bookkeeping paired with quarterly tax planning delivers the most value relative to cost compared to a once-a-year tax-only engagement.

Question 28

We're opening our first Retail Marijuana Store — when should we bring in a cannabis CPA?

Accepted Answer

Ideally before you finalize your entity structure and MED license application, since decisions made at formation — how ownership is structured, whether a separate non-plant-touching management entity makes sense, and how your chart of accounts will be built — are far cheaper to get right up front than to unwind after your first tax return is filed. Reach out as soon as you have a business plan and target location in a market like Denver, Aurora, Fort Collins or Colorado Springs, and we'll walk you through the accounting infrastructure you'll need before opening day.

Question 29

Can you help us switch accountants mid-year without disrupting our filings?

Accepted Answer

Yes, this is one of the most common ways clients come to us. We start with a books review to identify any 280E costing gaps, METRC reconciliation issues or missed filings left by a prior provider, correct what needs correcting, and take over ongoing bookkeeping and tax compliance on a timeline that avoids any missed deadline. Most transitions are completed within a few weeks with no gap in your monthly financial reporting.

Question 30

Do you provide services remotely, or do you visit our facility in person?

Accepted Answer

We serve MED-licensed operators across Colorado — including Denver, Colorado Springs, Aurora, Lakewood, Thornton, Arvada, Westminster, Pueblo, Boulder, Greeley, Longmont, Loveland, Grand Junction and Centennial — primarily through secure remote bookkeeping, video-based reviews and cloud accounting access, with on-site visits available for inventory walkthroughs, internal control reviews or new-location buildouts when it adds real value. Call us at (720) 730-6673 or email advisory@coloradocannabiscpa.com to schedule an initial consultation.

Colorado Cannabis Accounting Questions, Answered

280E & Federal Tax

Colorado Taxes

Accounting & Bookkeeping

METRC & Inventory

Audits & Compliance

Working With Us

Speak with a Cannabis CPA Colorado