How do I correctly calculate Cost of Goods Sold (COGS) for a cannabis cultivation business?

You start by capitalizing all direct materials and labor used to produce the crop. Then allocate allowable indirect production costs under §1.471-11 to your inventory during the year and include those costs in COGS when you sell the product.

What exactly is IRC §471-11, and why is it so important?

IRC §471¬-11 is a Treasury regulation that defines which costs a producer must include in inventory that becomes COGS at sale, extending beyond direct costs to necessary indirect production costs. This is crucial for cannabis growers because it is often the only place where many cultivation costs can be recognized for tax purposes under §280E.

What cultivation costs can be included in cannabis inventory?

The costs generally included are direct materials (plants, soil, nutrients), direct labor, utilities, rent for production space, maintenance, indirect labor, and quality control, but only if they are incident to production.

Can selling and marketing costs be included in COGS?

No. Marketing, sales, and distribution expenses are expressly excluded from inventory and COGS under §471-11 and are not deductible because §280E disallows them.

Do these rules apply to processors and extractors, too?

Yes. §471-11 applies to producers of inventory, which includes cultivators, processors, and manufacturers of cannabis products. Their inventory must be accounted for under the same principles.

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