§471 Inventory Cost Capitalization — Maximizing COGS for Cultivators Under §280E

💡 Accountant's Note

Because §280E prohibits deducting SG&A expenses but allows COGS under §471, cannabis companies have an enormous incentive to MAXIMIZE the costs that flow through COGS (into inventory first, then expensed when product is sold). This is not tax evasion — it is correct application of §471 full absorption costing, which requires manufacturers to include all direct and indirect production costs in inventory. For a cannabis CULTIVATOR: §471 absorption costing means capitalizing into WIP inventory: (1) DIRECT COSTS: seeds/clones, growing media, nutrients, direct cultivation labor, packaging, testing fees, (2) INDIRECT COSTS (under 'full absorption' §471(a)): cultivation facility rent, cultivation utilities (lighting, HVAC, irrigation), depreciation of cultivation equipment, security costs at the grow facility, quality control labor, maintenance at the grow facility. The key insight: every dollar moved from period expense into inventory (COGS) SAVES 21 cents in federal taxes under §280E — because COGS is deductible while SG&A is not. A cultivator with $10M in production costs who properly capitalizes $7M into inventory (vs. the $4M they might have expensed carelessly) reduces taxable income by $3M and saves $630,000 in federal taxes.