In the US, more than 23 states have made marijuana legal. The reason is that marijuana has certain health benefits and it can help patients get relief from pain and suffering. There are certain medical conditions such as AIDS, Glaucoma and Cancer for which marijuana can be prescribed to patients. But although the states have permitted the sale of marijuana, the drug is illegal federally. The IRS Code 280E was enacted to prevent producers, retailers and processors of marijuana from deducting expenses from their earnings. The IRS Code 280E
is loathed in the cannabis industry because its makes business owners determine the kind of expenses that they must include in the Cost of Goods Sold which will give them an idea of the expenses that are deductible and those that are not.
But the problem that taxpayers have faced since the enactment of the section is they have been provided with little guidance how to make this determination.
In 2015, more details on how this section should be applied have been provided which has made it easier to determine Cost of Goods Sold. As a result, marijuana business must follow inventory rules to compute Cost of Goods Sold. Expenses that can be included are direct material and labor costs and indirect costs such as maintenance, repair, utilities, etc.