Cannabis accounting that
holds up under IRS examination.
§280E audits are real, and cannabis operators face elevated examination risk. Most cannabis accounting doesn't survive that test — methodology is ad hoc, documentation is incomplete, books don't tie cleanly to filed returns. 420Ledger is built to pass.
What §280E examinations actually look like
§280E is one of the IRS's most actively examined areas in cannabis. The dispute is almost always about cost classification — what's properly in COGS versus what's an operating expense disallowed under §280E. The dollar exposure in a typical audit can exceed $100K–$500K depending on operator size.
When an auditor opens an examination, they ask for: the methodology used to classify expenses; the documentation supporting cost allocations; the reconciliation between book records, METRC inventory, POS sales, and bank deposits; the workpapers tying each line of the filed return to underlying records; consistency of treatment across periods.
Most cannabis accounting fails on at least three of those five fronts. Generic accounting software wasn't built around §280E. Methodology is often verbal rather than documented. Reconciliation gaps go unresolved between periods. The audit examiner asks "how did you arrive at this?" and the answer is "that's how we've always done it" — which doesn't survive examination.
The cost of failing an audit isn't just the additional tax owed. It's penalties (20% accuracy-related, sometimes more), interest, and the time cost of representing yourself through a multi-year examination. For an operator already operating on cannabis-industry margins, an audit loss can be existential.
Built for examination from the first transaction
420Ledger is built backward from the audit. Every feature is designed to produce documentation that survives examination. Methodology is consistent. Allocations are documented. Reconciliations are preserved. Positions are traceable.
280E allocation, methodologically defensible
Every expense in the chart of accounts carries a 280E classification: COGS, allocable, or disallowed. Allocations follow consistent vendor-level rules (e.g., 25% of rent attributable to retail floor space). When an auditor asks "how did you arrive at 25%?", the answer is documented in the methodology layer of the platform — square footage analysis, time studies, or other defensible basis. The same rule applies in every period; consistency itself is an audit defense.
POS, METRC, and bank reconciled monthly
For cannabis operators, reconciliation across POS sales, METRC inventory movements, and bank deposits is essential. A discrepancy between any two creates an audit gap that auditors investigate first. 420Ledger reconciles all three monthly and flags variances by severity (low, medium, high, critical). Variances aren't suppressed — they're investigated, documented, and resolved with notes. Audit examiners reviewing these workpapers see a controlled environment, not a black box.
Every line of every return tied to source
When the federal return is prepared, every line ties back to a workpaper. Schedule M-1 reconciliation is automatic. Form 1125-A (cost of goods sold) shows the cost flow. Schedule L balances are tied to the trial balance. Schedule K matches the K-1s generated for shareholders or partners. The audit examiner asking "where does this number come from?" gets a one-click answer.
Decisions preserved with rationale
Every meaningful position taken on a return — cost allocation methodology, inventory method election, treatment of mixed-use expenses, planning vs filing position decisions — is documented at the time it's made, with rationale, in the practice's records. The methodology is dated and preserved. If an audit happens three years later, the question "why did you do it that way?" has a documented answer from the time of filing.
Consistent treatment, period over period
Inconsistent treatment across periods is one of the fastest ways to escalate an audit. Vendor classification rules apply uniformly. Allocation methodologies persist. Reconciliation templates are the same in March as they are in December. When the auditor reviews three years of returns, they see the same approach applied consistently — which is itself a strong indicator of professional preparation.
What this looks like in practice
When the IRS sends you an examination notice, the first thing requested is documentation of methodology. With 420Ledger, that's already produced and preserved. You don't scramble — you forward.
When your auditor asks how rent was allocated for any month in any year, the answer is one click away in your workpapers. The methodology, the calculation, the supporting documentation — all there.
When inconsistencies appear (and in cannabis operations, they sometimes do — cash variances, METRC discrepancies, POS timing), they're flagged, investigated, and resolved with notes at the time. Three years later, you don't have to remember what happened in May 2024 — the records do.
Audit defense isn't a service we provide reactively when something goes wrong. It's the design constraint that shaped every part of how the books are kept and the returns are prepared. Examination is something we plan for from day one of every engagement.
Built by a cannabis-focused preparer, for cannabis-focused work
420Ledger isn't generic accounting software adapted for cannabis. It's purpose-built for the §280E reality, the METRC reconciliation requirement, the cannabis-specific compliance calendar, and the operational realities of dispensary operations. Every feature exists because it solved a problem in actual cannabis accounting work.
The platform is operated by Arshdeep Dhaliwal, a NJ-based PTIN and EFIN registered tax preparer. Returns are prepared and signed as paid preparer. The practice is currently scoped to NJ dispensary operators, with expansion planned as the practice grows.
See if this fits your operation
A 15-minute introductory call to walk through your specific situation. No pitch — just an honest read on whether 420Ledger is the right fit for your operation.
PuffSeal LLC d/b/a 420Ledger. Cannabis-only accounting firm. 27 states.