Cannabis Law Glossary
Section 280E
Definition
IRS code provision that disallows federal tax deductions for businesses trafficking Schedule I or II controlled substances, forcing cannabis operators to pay tax on gross profit.
What Is Section 280E?
Section 280E of the Internal Revenue Code prohibits businesses engaged in "trafficking" Schedule I or II controlled substances from claiming most ordinary business deductions. Because cannabis remains a Schedule I substance under the Controlled Substances Act, cannabis companies are generally barred from deducting rent, salaries, marketing, and other standard business expenses.
How It Works in Practice
A cannabis retailer might generate $5 million in revenue with $4 million in operating expenses. Under normal tax rules, the business would pay tax on $1 million of profit. Under 280E, however, only Cost of Goods Sold (COGS) may be offset — leaving a taxable income figure that can far exceed actual economic profit. Effective tax rates of 70–90% are not uncommon for vertically integrated operators.
The COGS Carve-Out
The one meaningful exception is that 280E does not disallow deductions allocable to Cost of Goods Sold under IRC § 471. Sophisticated operators use IRC § 471(c) (added by the Tax Cuts and Jobs Act of 2017) to expand what costs qualify as COGS, potentially capturing indirect overhead costs. Proper accounting segregation between plant-touching and non-plant-touching activities is critical.
Business Structure Implications
Many multi-state operators maintain separate legal entities for their management companies, technology platforms, and licensed dispensary or cultivation operations. This structure aims to keep non-plant-touching revenue in entities not subject to 280E. Aggressive structuring has attracted IRS scrutiny — careful documentation and defensible business-purpose rationale are essential.
Related Terms
See also: [IRC 471(c)](/glossary/cannabis-banking-irc-471c), [Cannabis Rescheduling](/glossary/cannabis-rescheduling), [Cole Memo](/glossary/cole-memo)
Work With Hoban Law Group
Navigating 280E requires coordinated tax counsel, accounting expertise, and regulatory strategy. [Schedule a consultation](/consultation?source=glossary&term=section-280e) to discuss your structure.
Authoritative Sources
Work with Hoban Law Group
Schedule a consultation
Have questions about Section 280E or how it applies to your business? Our team prepares a regulatory briefing before you speak. No cost. No commitment.
Engage Hoban Law Group