Reconcile Your Inventory to Metrc Before December 31

Your December 31 inventory number does three jobs. It sets cost of goods sold, which under 280E is the only deduction adult-use operators get. It has to match what Metrc says is on the premises. And it's the number a lender, buyer or auditor will read first.

One count serves all three. Most operators run it in a rush between holiday orders and the close, which is how a fixable data problem turns into a tax problem or a compliance finding. Seven weeks out, there's still time to do it properly.

Why the count carries more weight under 280E

Cost of goods sold is beginning inventory plus purchases, minus ending inventory. The IRS has said cannabis businesses compute it under the Section 471 inventory rules, and those rules say book inventory should be verified by physical inventories at reasonable intervals and adjusted to match.

That makes ending inventory a tax number. Say a retailer's books show $1.5M in inventory, and the count finds $60K of it isn't on the shelf. Leave it on the books and COGS is $60K too low. Under 280E, where almost nothing else is deductible, that's $60K of extra taxable income: about $12,600 in federal tax at the 21% corporate rate, paid on gross profit that never existed.

Two things make the count matter more this year. Medical activity moved to Schedule III, so inventory should be counted and tagged by channel if you hold both licenses. And flower prices kept falling, so the count is also the moment to value inventory at what it would actually sell for.

Plan the count before December

Pick the date and the cutoff. Decide now whether you count on December 31, the last business day, or the first morning of January, and write down the cutoff rules. Incoming manifests received before the cutoff are counted. Outgoing deliveries that left before it are not. Get the cutoff wrong and you'll spend January chasing variances that aren't real.

Freeze movement. No transfers between rooms or locations, no repackaging and no new batches during the count. If you're a retailer, count after close or before open.

Count blind, in pairs. Counters shouldn't see the expected quantity, or they'll find it. One person counts and one records, by package tag, not by product name. Scales used for bulk flower get calibrated the week before.

Clean the catalog first. Duplicate SKUs and products mapped to the wrong package make a clean count look wrong. Fix the duplicates in November so December's variances are real.

Sort the variances before you fix them

Once the count is done, compare it three ways: physical against Metrc, Metrc against the POS or ERP, and the POS against the general ledger. Every variance falls into one of three groups, and each needs a different fix.

Data errors. Wrong package tag, wrong unit of measure, a sale rung to the wrong item. These get corrected, not written off.

Timing differences. Product in transit, a manifest not yet received, a return not yet processed. Match these to the paperwork and they usually disappear.

Real loss. Moisture loss in bulk flower, waste that was never recorded, damage, or theft. These get adjusted in Metrc with a documented reason.

The order matters. Fix Metrc first, then the POS or ERP, then the books. Adjusting the general ledger to match a count while Metrc still disagrees just moves the problem somewhere a regulator can see it.

Don't let December carry eleven months of drift

States expect reconciliation all year, not once at year-end. California, for example, requires licensees to reconcile on-premises inventory with the track-and-trace system at least once every 30 calendar days. A single large year-end adjustment that nobody can explain is exactly what draws attention. As we covered in our post on how Metrc mismatches become license risk, a Michigan processor lost its license permanently after investigators found product tagged into inventory that wasn't there.

The fix is to run a cycle count in November on the highest-value categories, usually flower and vapes, so the year-end count confirms what you already know instead of surprising you.

Your year-end count checklist

1. This month: cycle count flower and vapes, and clean up duplicate SKUs.
2. By December 1: set the count date, write the cutoff rules, and assign count pairs.
3. The week before: calibrate scales and confirm every open manifest.
4. Count day: freeze movement, count blind by package tag, record by channel if you hold medical and adult-use licenses.
5. Within 48 hours: sort variances into data errors, timing and real loss, and fix Metrc first.
6. Before the close: post the adjustments to the books, value inventory at what it would sell for, and keep the count sheets with your tax file.

None of this is tax or legal advice, and reconciliation rules vary by state. The rest of the year-end list is in our Q4 checklist.