How does Section 280E of the Internal Revenue Code affect cannabis businesses’ taxes, and what strategies can help manage its impact?

AlphaRoot Team

Section 280E prohibits businesses that traffic in Schedule I or II controlled substances (including cannabis) from deducting ordinary and necessary business expenses. Because cannabis remains illegal under U.S. federal law, dispensaries and cultivators cannot deduct typical expenses like rent or salaries and end up paying effective tax rates far higher than other industries. Only the cost of goods sold (COGS) can be subtracted from revenue. To cope with this, companies should:
• Work with accountants experienced in 280E to maximize allowable COGS allocations and ensure proper record‑keeping.
• Maintain meticulous documentation of all transactions and inventory to substantiate COGS.
• Evaluate corporate structures; some operators create separate ancillary companies (e.g., for intellectual property or management services) that may deduct expenses unrelated to the plant itself (consult a tax professional).
• Budget for the high tax burden and pay estimated taxes quarterly to avoid penalties.
Although rescheduling could ease the burden, 280E remains a serious cost driver, so proactive tax planning is essential.