Cost of goods sold (COGS) under 280E

Cost of goods sold is the cost of producing or buying products for sale. Cannabis businesses subject to Section 280E can still subtract it from gross receipts, even though most other business deductions are blocked.

What COGS means under 280E

Cost of goods sold, or COGS, is the cost of producing or buying the products a business sells. For cannabis businesses subject to Section 280E, it matters more than usual. Section 280E blocks ordinary business deductions, but COGS is subtracted from gross receipts rather than taken as a deduction, so it remains available.

How it works

Gross receipts minus COGS: taxable income starts from revenue less COGS, before any deductions.
Inventory rules: which costs can be included in COGS depends on federal inventory accounting rules under Section 471.
Producers and resellers: cultivators and manufacturers can generally include more production costs in inventory than retailers that only resell products.
Limits: courts have generally rejected attempts by cannabis businesses to use broader capitalization rules to move more costs into COGS.

Why it matters

Because most other expenses are not deductible under 280E, how costs are classified and tracked can have a large effect on federal income tax. Since April 2026, marijuana covered by a qualifying state medical license is in Schedule III, so 280E no longer applies to that medical activity. Adult-use activity remains subject to it.

What to look for

Inventory records that support every cost included in COGS.
Clear separation of medical and adult-use revenue and costs.
An accountant experienced with cannabis inventory and 280E.

How Safe Harbor helps

Safe Harbor's back-office support includes cannabis-specific bookkeeping and inventory cost tracking.