Maryland 280E Guide

What 280E actually disallows

280E removes deductions and credits below the gross income line. It does not touch cost of goods sold, which is a reduction in gross receipts rather than a deduction. Everything in a 280E engagement therefore turns on which costs are properly inventoriable under IRC 471 and the regulations that govern producers and resellers, and whether your records prove it.

Cost of goods sold by license type

A dispensary is generally a reseller: invoice cost, transportation-in, and a narrow band of purchasing and handling costs land in inventory. A cultivator or processor is a producer, which opens up direct labor, direct materials, and a defined set of indirect production costs — cultivation utilities, grow-room depreciation, quality control, and production supervision.

• Reseller COGS: invoice price, freight-in, purchasing, handling, and storage of goods held for sale
• Producer COGS: direct materials, direct labor, and allocable indirect production costs
• Selling, general, and administrative costs remain disallowed under 280E
• Allocation methodology must be consistent, documented, and applied period over period

Documentation that holds up

Examiners rarely dispute the theory; they dispute the substantiation. Time-tracking by function, square-footage studies, a chart of accounts that separates production from sales activity, and a written allocation memo are what turn a position into a defensible one. Build them contemporaneously — reconstructing an allocation two years later is the most common reason a position collapses.

Rescheduling and the transition

A move to Schedule III would end 280E prospectively for tax years it applies to, but it does not retroactively repair prior positions. Operators should keep maximizing inventoriable cost today, evaluate protective refund claims where appropriate, and be ready to change accounting methods cleanly rather than abruptly.