280E Tax Planning for Cannabis Businesses

What 280E actually says

Section 280E of the Internal Revenue Code says businesses trafficking in Schedule I or II controlled substances cannot deduct ordinary business expenses. Cannabis is still Schedule I federally. That means a dispensary generating $2M in revenue with $800K in normal operating expenses (rent, payroll, marketing, utilities) cannot deduct any of them. The only deduction allowed is cost of goods sold (COGS).

For a cultivation operation, COGS includes seeds, soil, nutrients, grow lights, and labor directly involved in plant production. For a dispensary, COGS is essentially the wholesale cost of inventory purchased for resale. Everything else (your receptionist, your Weedmaps advertising, your accountant fees) is non-deductible.

The math that kills unprepared operators

A normal retailer with $2M revenue, $1M COGS, and $800K operating expenses pays tax on $200K profit. A cannabis dispensary with identical numbers pays tax on $1M ($2M minus $1M COGS, with $800K in expenses completely disallowed). At a 35% effective rate, that's $350K in taxes on a business that actually made $200K. You owe more than you earned.

This is why cannabis businesses fail at higher rates than other retail. The tax burden is structurally designed to be punishing, and operators who don't plan for it discover the problem when their first tax return is due.

Legal strategies to maximize COGS

The key is proper cost accounting. A cannabis-specialized CPA allocates every defensible dollar to COGS. For cultivators, this includes facility costs tied to production (a portion of rent, utilities, depreciation), packaging materials, quality control testing, and direct labor. For manufacturers, it includes extraction equipment, processing labor, and ingredient costs.

The IRS uses the rules from IRC Section 263A to determine what qualifies as COGS for cannabis. These "uniform capitalization" rules let you include indirect costs that support production: warehouse rent, equipment maintenance, quality assurance staff, and production supervisors.

Entity structuring

Many operators split their business into plant-touching and non-plant-touching entities. The plant-touching entity (the license holder) handles cultivation, processing, or retail. The non-plant-touching entity provides management services, IP licensing, real estate, or consulting to the plant-touching entity. Non-plant-touching entities can deduct normal business expenses because 280E doesn't apply to them.

This structure has to be legitimate. The IRS scrutinizes related-party transactions in cannabis. Transfer pricing between entities must reflect fair market value. Work with a cannabis attorney and CPA together on entity design.

What the SAFE Banking Act would change

Federal rescheduling or the SAFE Banking Act wouldn't automatically fix 280E. Rescheduling to Schedule III would remove the 280E burden entirely, but SAFE Banking only addresses financial services access. As of early 2026, 280E remains fully in effect. Plan your tax strategy assuming it stays.

Finding the right CPA

Your CPA needs direct cannabis 280E experience. Ask how many cannabis returns they've filed, whether they've handled an IRS audit of a cannabis business, and what their average COGS allocation rate is for your license type. Browse cannabis accountants and tax specialists in our directory to find qualified CPAs in your state.