COGS (Cost of Goods Sold) in Cannabis
The only category of expenses U.S. cannabis operators can deduct against revenue under IRC 280E — making COGS classification a central tax-planning concern.
Definition
Cost of Goods Sold (COGS) is the direct cost of producing the products a company sells — for cannabis, that means cultivation labor, growing supplies, packaging, and direct production overhead. In every industry, COGS is a deductible expense. But under IRC Section 280E, COGS is the only deductible expense available to U.S. plant-touching cannabis operators, making the boundary between 'COGS' and 'operating expense' the most consequential accounting line in the industry.
Also known as: Cost of Goods Sold, Cost of Sales
Why It Matters for Investors
Operators aggressively allocate as much overhead as possible into COGS — including indirect production labor, facility costs tied to cultivation areas, and packaging — to maximize their deductible expense base under 280E. This produces gross margin profiles in cannabis that are not directly comparable to other CPG categories, and makes interpreting MSO income statements an exercise in tax-allocation literacy.
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