Why RE or DE- scheduling Won’t Save You—But a Cost Accountant Will Part 2

Dear Processors: You're Manufacturers Too. Here's How You Get Deductions Under § 471-11

“I just make vape carts, not grow the plant—IRS won’t come for me.”

That’s adorable. You’re a manufacturer, and Uncle Sam wants to see your cost structure as clearly as your distillate. The full absorption method under § 471-11 isn’t optional—it’s your best tool for keeping more of your money.

A History of Inventory Costing in Manufacturing

Section 471 of the Internal Revenue Code didn’t sprout out of cannabis legalization. It’s been the backbone of manufacturing accounting since the Kennedy era. Cultivators, like all farmers, are required to use the full absorption method under § 1.471-11 to allocate both direct and indirect costs into inventory.

Translation: You can’t just expense everything in QuickBooks and call it a day.

What the IRS Says About Cannabis Processors

If you alter the raw flower (i.e., extract, infuse, roll, blend), you’re a manufacturer. That means:

• You must allocate raw materials, labor, utilities, and overhead into inventory.

• You can’t deduct these costs until the product is sold.

✅ Done correctly: deductions are preserved.
❌ Done lazily: IRS disallows your entire COGS, just like they did in San Jose Wellness.

Hidden Deductions You Can’t Afford to Miss

If you alter the raw flower (i.e., extract, infuse, roll, blend), you’re a manufacturer. That means:

• You must allocate raw materials, labor, utilities, and overhead into inventory.

• You can’t deduct these costs until the product is sold.

✅ Done correctly: deductions are preserved.
❌ Done lazily: IRS disallows your entire COGS, just like they did in San Jose Wellness

Conclusion

Not all accountants and CPA’s are equipped to handle the unique demands of the cannabis industry. Look for one who is deeply immersed in the space, proactive about regulatory changes, and ready to act as a strategic partner in your business growth. We know what costs the IRS lets you keep. You’re not just running a lab—you’re running a manufacturing operation. We’ll build your cost accounting model to support full § 471-11 compliance, and lower your taxable income.

At Niche Accounting, we specialize in cost accounting for cannabis cultivators. Don’t wait until you’re in the weeds—book a free consultation and let’s grow your profit margins like your yield.

🌿 Schedule a strategy call today

1.471-11- Inventories of Manufacturers