Why Payroll Allocation Drives 280E Outcomes
For most licensed operators, payroll is the single largest line item, and it is also the line item most affected by 280E's split between deductible cost of goods sold and non-deductible operating expense. A grower's wages generally belong in COGS; a budtender's wages generally do not; a facilities manager splitting time across a cultivation room and a retail counter needs a documented time allocation to support whichever split the business claims.
Time Tracking and Job Costing by Role
Employees whose duties span both production and non-production activity need a system — time sheets, activity codes in the payroll system, or a defensible study-based allocation — that supports the percentage of wages capitalized into inventory versus expensed. Guessing at a round percentage without documentation is one of the more common findings in a 280E examination.
- Assign activity codes at the payroll system level for employees who split time between cultivation, manufacturing and retail duties.
- Revisit allocation percentages at least annually, or whenever staffing structure changes materially.
- Keep job descriptions and time records aligned so an auditor can trace the allocation back to source documentation.
Multi-Jurisdiction Withholding and Local Considerations
Operators with locations in more than one Colorado municipality need payroll systems configured for the correct state withholding and any applicable local occupational privilege taxes, such as those assessed by Denver and a handful of other Colorado municipalities on employees working within city limits.
Worker Classification Risk in Cannabis
Cannabis businesses sometimes lean on independent contractor arrangements for trimming, delivery, or seasonal harvest labor. Colorado applies its own worker classification standards independent of federal tests, and misclassification exposure compounds quickly once unpaid unemployment insurance contributions, workers' compensation premiums, and penalties are added to a reclassification finding.
