Marijuana is an illegal drug under federal law and I.R.C. Sec. 280E bars deductions for any amounts related to trafficking in controlled substances. However, the taxpayer can reduce gross receipts by the cost of goods sold. Here, IRS said that expenses that would not be included in cost of goods sold because they would normally be capitalized under I.R.C. Sec. 263A (and reduce income) cannot be capitalized when they relate to selling marijuana. Also, IRS said that when they audit a cash-basis marijuana seller, the IRS can allow the seller to deduct its costs that would have been inventoriable had the taxpayer used the accrual method. C.C.A. 201504011 (Dec. 10, 2014).