Rev. Rul. 2024-12: IRS Narrows §280E Deduction Allocation for Cannabis Retailers

## Overview Revenue Ruling 2024-12 addresses the longstanding dispute over which costs cannabis retailers and dispensaries may allocate to cost of goods sold (COGS) as a method of reducing their otherwise disallowed deductions under IRC §280E. The ruling clarifies that selling, general, and administrative expenses directly attributable to the retail sales floor — including display fixture depreciation, point-of-sale system costs, and certain payroll allocated to customer-facing roles — cannot be reclassified as production or acquisition costs for §280E COGS purposes. ## Key Holdings The IRS held that §280E prohibits deductions for expenses incurred in a trade or business that consists of trafficking in controlled substances. Revenue Ruling 2024-12 draws a clear line between (1) true inventory acquisition and production costs which reduce gross receipts and remain deductible, and (2) any cost allocations that would effectively re-characterize prohibited deductions as COGS. ## Industry Impact This ruling targets a popular planning strategy used by hundreds of vertically-integrated cannabis operators who allocated a portion of their storefront overhead to COGS using creative accounting methods. The ruling is adverse for multi-location dispensary groups and MSOs with high retail overhead. ## What Operators Should Do Now Operators currently using aggressive COGS allocation strategies should consult qualified cannabis tax counsel immediately to assess exposure and evaluate the §471(c) safe harbor election as an alternative planning pathway. Operators with open tax years face potential audit adjustment risk on positions inconsistent with this ruling.