280E Considerations for California Manufacturers
Type 6 and Type 7 licensees are producers, and the production cost pool is broad: input biomass and distillate, solvents, terpenes, hardware and packaging, extraction and infusion labor with burden, equipment depreciation, C1D1 booth and kitchen occupancy, production utilities and in-process quality control. Those costs enter inventory and reach the return through COGS.
Sales commissions, brand spend, executive pay and the office stay outside inventory and are disallowed federally. Manufacturers who sweep everything into the production pool put the legitimate portion at risk along with the aggressive portion, which is the opposite of the intended outcome.
Because conversion cost is a large share of total cost, small improvements in yield and throughput translate directly into a lower cost per unit and, after 280E, a materially better after-tax result than the same improvement would produce at a retailer.
- Inventoriable: materials, production labor, conversion overhead, packaging, QA
- Disallowed federally: selling, brand, executive and general administration
- Allocation drivers: machine hours, labor hours, unit counts, measured square footage
Cost Accounting, Inventory and METRC in Manufacturing
Each SKU needs a bill of materials and a standard cost, and every period's actuals need to be compared against it. Variance decomposes into input price, biomass usage, extraction yield and labor efficiency — four different problems with four different owners. Without standards, a margin move has no explanation.
In METRC, manufacturing is a chain of package transformations: inputs are consumed, a production batch is created, and output packages are tagged. Financial records mirror that genealogy through work in process, so batches open at period end carry a real valuation rather than a guess. Failed runs and destruction events are recorded in both the compliance log and the ledger, with normal loss absorbed into good units and abnormal loss expensed.
Shared-use Type S arrangements and white-label tolling need explicit treatment. If the client owns the material, it is service revenue and the material stays off your inventory; if you buy inputs and sell finished goods, it is product revenue with full inventory accounting.
Tax Planning and Recommended Services
Planning for manufacturers is mostly cost-system planning: get the BOM right, get the allocations documented, keep the METRC reconciliation current, and the federal position takes care of itself. On top of that sit equipment purchase timing, capacity decisions on the constrained asset, and the California conformity difference that makes the state return look nothing like the federal one.
We build the accounting system first and let the tax return follow it. If you operate a licensed California manufacturing facility, a diagnostic review will quantify what your current treatment is costing you before any engagement begins.
