§280E Risk Review & Engagement Routing Memo
| Entity | EIN (example) | License type | Role |
|---|---|---|---|
| Northgate Cultivation LLC | 88-0000000 | Adult-use + Medical cultivation | Operating entity — plant-touching |
| Northgate Retail LLC | 88-0000001 | Adult-use retail (microbusiness) | Dispensary — plant-touching |
| Northgate Holdings LLC | 88-0000002 | — (no cannabis license) | Real-estate / IP holding — ancillary, non-plant-touching |
Engagement routing. Tier: Diagnostic → scoped engagement · Posture: Mixed (medical + adult-use) · Active IRS matter: No · Services indicated: COGS Review · Schedule III Transition Planning · §6050I Cash Compliance · §471(c) / 8275-R Return Disclosure
Prepared for the named operator under a limited-scope diagnostic engagement. This example is illustrative and does not constitute tax or legal advice to any reader; no client relationship is created by viewing it. A real §280E Risk Review is delivered in writing by a credentialed Enrolled Agent and is not a signed return, a filed refund claim, or an audit defense — those are scoped and engaged separately under an engagement letter and, where representation is involved, a Form 2848. Federal cannabis scheduling and IRS guidance are changing rapidly in 2026; positions are verified against current authority before any return is signed.
What the numbers say, in one paragraph
Northgate runs a mixed medical/adult-use cultivation business in California alongside a small adult-use retail license and a non-plant-touching holding entity. On the figures provided, the operating cultivation entity carries a thin cost-of-goods-sold position and a medical-versus-adult-use allocation with no square-footage support — together the largest recoverable exposure. Cash-reporting hygiene under §6050I and Schedule III transition readiness are live but secondary. No active IRS matter was reported, so audit-defense, trust-fund, and collections work are monitored rather than engaged.
An under-absorbed COGS method appears to be inflating the §280E disallowance on the order of $60,000–$150,000 per year, with a further $25,000–$70,000 tied to the unsupported medical/adult-use allocation. Controlling authority is flagged below; these are illustrations of the mechanism, not conclusions, and are confirmed only against real books.
The situation as presented
Facts below are as reported by the operator for the diagnostic and are illustrative. They are not independently verified in a $375 diagnostic; verification is part of any downstream engagement.
Business overview
A boutique California grow — roughly 10,000 sq ft of canopy and on the order of $620,000 in annual gross receipts — operating from a single location. Cultivation and retail sit in separate licensed entities; a third entity holds the real estate and brand IP and touches no plant.
License posture detail
The operating entity holds both a medical and an adult-use cultivation designation (Mixed). A separate adult-use microbusiness license covers retail. Both licensed entities are plant-touching and therefore within the reach of §280E; the holding entity is ancillary and non-plant-touching, and on these facts sits outside §280E's scope. §280E is not asserted uniformly across the group — it is applied to the trade or business that traffics, entity by entity.
Revenue streams
- Bulk flower — adult-use channel (majority of receipts)
- Medical flower — medical channel
- Trim / biomass sold to manufacturers
- Intercompany rent to the holding entity (non-cannabis, ancillary)
Cash profile
Cash-intensive, as is typical for the segment: a meaningful share of receipts arrive as cash, including individual receipts above $10,000. Books are reconstructed from POS, Metrc, and bank records; the reconciliation is partial, and Form 8300 filing history is incomplete on the records provided.
Reading the exposure
§280E exposure summary
IRC §280E denies deductions and credits to a trade or business that consists of trafficking in Schedule I or Schedule II controlled substances. Cannabis remains a Schedule I substance federally, so ordinary operating deductions of the plant-touching entities are disallowed. What survives is cost of goods sold — a return of capital, not a deduction — so the entire game is how much legitimate production cost is defensibly captured in COGS.
COGS defensibility snapshot
As a producer (cultivator), Northgate's inventoriable costs are governed by the full-absorption method of Treas. Reg. §1.471-11(c). The COGS as presented appears to exclude several categories of indirect production cost that §1.471-11(c) allows a producer to absorb into inventory — the single most common way a grow overpays under §280E. This is a §471-11 costing question and is distinct from the small-business §471(c) method election, which is addressed separately in the return-disclosure workflow.
Cash / §6050I exposure
A person who receives more than $10,000 in cash in a trade or business must report it on Form 8300 under IRC §6050I. The records provided suggest filings may be missing or late. Penalties apply per unfiled or late report, and the exposure escalates sharply where the failure is treated as intentional disregard.
Payroll / §6672 exposure
Employment-tax deposits appear current on the facts provided. Flagged for completeness: where trust-fund taxes are withheld and not paid over, responsible persons face the trust fund recovery penalty under IRC §6672. On these facts the exposure reads low and is monitored, not engaged.
Collections / lien exposure
No assessed federal balance was reported. Absent an assessed liability, the federal tax lien under IRC §6321 and levy under IRC §6331 machinery is not engaged. Monitored so that any new assessment is caught before enforced collection begins.
§280E reaches only Schedule I and Schedule II substances. If cannabis is rescheduled to Schedule III, §280E would cease to apply to the cannabis trade or business going forward — the single largest change on Northgate's horizon. The transition window is the period around that change, and it is where a mixed operator gains or loses the most.
Position now: (1) maximize defensible COGS under Treas. Reg. §1.471-11(c) while §280E still bites; (2) prepare the books to deduct ordinary operating expenses on a go-forward basis the moment rescheduling is effective; (3) evaluate — carefully — whether prior-year §471 corrections support a defensible amended return, noting that retroactive relief is contested and the IRS is pushing back. This posture is why the diagnostic routes to Transition Planning first.
Prioritized exposure register
Controlling authority or evidence type is flagged for each item. Conclusions are illustrative and not asserted until the position is run against real books and current guidance. Exposure bands are order-of-magnitude illustrations, not estimates for any taxpayer.
| Issue | Controlling authority / evidence | Illustrative exposure band | Priority |
|---|---|---|---|
| Under-absorbed COGS overstates the §280E disallowance | IRC §280E; Treas. Reg. §1.471-11(c) | ~$60k–$150k / yr overpaid | High |
| Medical vs adult-use allocation lacks square-footage support | Evidence: canopy measurement + Metrc square-footage records | ~$25k–$70k / yr | High |
| Cash receipts over $10k without timely Form 8300 | IRC §6050I; Form 8300 | Penalty exposure ~$30k+ | Elevated |
| Return positions contrary to a regulation not disclosed | IRC §471; Form 8275-R | Penalty-protection gap | Elevated |
| Prior-year amended-return / §471 correction feasibility | IRC §471; Treas. Reg. §1.471-11 (contested) | Contingent refund | Review |
| Payroll trust-fund exposure (monitor) | IRC §6672 | Low on current facts | Low |
| Lien / levy exposure (monitor) | IRC §6321 (lien); IRC §6331 (levy) | None assessed | Low |
Which engagements are indicated, in what order
Of Green's seven scoped engagements, four are indicated for this illustrative operator. Owners and deadlines are placeholders; real sequencing is set in the ten-minute review.
| Engagement | Why indicated | Seq. | Owner | Target |
|---|---|---|---|---|
| §471-11 / §280E COGS Review | Recover the overstated §280E disallowance from thin COGS | 1 | J. Williams, EA | [+30 days] |
| Schedule III Transition Planning | Position books for rescheduling; scope prior-year §471 review | 2 | EA + client controller | [+45 days] |
| §6050I Cash Compliance / Form 8300 | Remediate missing filings; install a cash-reporting SOP | 3 | Client + EA | [+60 days] |
| §471(c) / 8275-R Return Disclosure & Filing | Disclose method positions on the next return | 4 | J. Williams, EA | [next return] |
- §7602 Audit Defense & Appeals — no active examination reported.
- §6672 Trust-Fund Defense — employment-tax deposits current.
- §6321 / §6331 Collections Relief — no assessed federal balance.
Supporting shells
Exhibit A — Exposure heat-map
| Exposure area | Likelihood | Impact | Priority |
|---|---|---|---|
| §280E disallowance / thin COGS | High | High | Address first |
| Medical / adult-use allocation | High | Medium | Address first |
| §6050I / Form 8300 | Medium | Medium | Remediate |
| Return disclosure (8275-R) | Medium | Low | Next filing |
| §6672 trust-fund | Low | High | Monitor |
| §6321 / §6331 collections | Low | High | Monitor |
Exhibit B — Entity register
| Entity | EIN (example) | License type | Role | §280E scope |
|---|---|---|---|---|
| Northgate Cultivation LLC | 88-0000000 | Adult-use + Medical cultivation | Operating — plant-touching | In scope |
| Northgate Retail LLC | 88-0000001 | Adult-use retail (microbusiness) | Dispensary — plant-touching | In scope |
| Northgate Holdings LLC | 88-0000002 | — (no cannabis license) | Real-estate / IP holding — ancillary | Out of scope |
Exhibit C — Document-request starter list
- Prior-year federal return (or gross receipts by activity, COGS claimed, total deductions)
- Canopy breakdown by designation — medical vs adult-use square footage
- Overhead totals — rent, utilities, payroll registers
- Current cost-allocation method and workpapers, if any
- Metrc production and transfer reports for the period
- POS export and bank statements for reconciliation
- Form 8300 filing log and cash-receipt records over $10,000
- Entity chart, operating agreements, and license certificates
Findings, actions, and what's open
- Thin COGS is overstating the §280E disallowance — the largest recoverable exposure.
- Medical / adult-use allocation is unsupported by square-footage records.
- Form 8300 filing history is incomplete.
- No active IRS matter; trust-fund and collections exposure are low.
- Engage §471-11 / §280E COGS Review (Seq. 1).
- Scope Schedule III Transition Planning + prior-year §471 review.
- Rebuild Form 8300 log; install cash-reporting SOP.
- Draft §471(c) / 8275-R disclosure for the next return.
- Next estimated-tax due date — confirm safe-harbor coverage.
- Amended-return statute window — review before it closes.
- Next return filing — disclosure attached.
- Canopy measurement records (medical vs adult-use).
- Complete Metrc + bank export for reconciliation.
- Cash-receipt log to reconstruct Form 8300 history.
Book your §280E Risk Review — $375
Send five inputs, and a licensed Enrolled Agent recomputes your allocation and COGS position, writes it up in a memo like the one above, and walks you through it on a ten-minute call. If the work isn't worth your time, you'll know in ten minutes.
Book the $375 Risk Review →Single-location California operators · EA-signed, exam-ready