Can a cannabis business deduct any expenses at all?

Yes — cost-of-goods-sold (COGS) remains deductible under Section 280E. Maximizing what is properly allocable to COGS through rigorous documentation is the primary legal mechanism for reducing effective tax rates.

Will cannabis rescheduling eliminate 280E?

Reclassifying cannabis from Schedule I to Schedule III would remove it from 280E's scope, because 280E applies to Schedule I and II controlled substances. However, rescheduling is not yet final, and any effective date and transition rules would need to be evaluated when the final rule publishes.

Is a dual-entity 280E structure legal?

Dual-entity structures separating cannabis and non-cannabis activities are used in the industry and have withstood some IRS scrutiny when properly documented. They must reflect genuine operational separateness and arm's-length pricing. Poorly documented structures have been challenged successfully by the IRS.

280E Tax Strategy for Cannabis

How cannabis businesses legally minimize the impact of Section 280E — cost allocation methods, entity structures, and the status of rescheduling as a potential legislative fix.

What Is Section 280E?

Section 280E of the Internal Revenue Code prohibits businesses that "traffic in controlled substances" from deducting ordinary business expenses. Because cannabis remains a Schedule I controlled substance under federal law, cannabis companies are barred from deducting rent, payroll, marketing, and most other ordinary business costs — even when fully licensed under state law.

The result: effective federal tax rates of 60–80% are common in cannabis, versus 25–35% for comparable non-cannabis businesses.

The Cost-of-Goods-Sold Exception

Section 280E does not disallow cost-of-goods-sold (COGS). Businesses may still deduct the direct costs of producing the goods they sell. For cultivators and manufacturers, this creates significant planning opportunity by maximizing what is properly allocable to COGS.

Items Typically Includable in COGS

Direct materials (seeds, clones, packaging, extraction inputs)
Direct labor attributable to production
Manufacturing overhead (utilities, depreciation on production equipment, facility costs allocable to production)

Items NOT Includable in COGS

G&A salaries (CEO, CFO, legal, marketing)
Advertising and marketing expense
Retail store labor not directly engaged in dispensing
Interest expense

Entity Structuring Strategies

Some operators use dual-entity structures to separate their cannabis trafficking activity (subject to 280E) from ancillary businesses (not subject to 280E), such as consulting, management services, or branded merchandise. These structures require careful pricing at arm's-length and must be operationally genuine — not merely tax-motivated allocations.

The Rescheduling Wild Card

The DEA's proposed reclassification of cannabis from Schedule I to Schedule III would remove cannabis from 280E's scope, immediately unlocking deductions across the industry. The timeline and final form of rescheduling remain uncertain as of 2026. Operators should model both the current 280E world and a post-rescheduling scenario when evaluating capital structure and growth decisions.

Audit Risk

The IRS has consistently challenged aggressive COGS allocations in cannabis audits. Defensible positions require contemporaneous documentation — allocation methodologies, time-tracking, production records — not retrospective reconstruction at audit time.

Working with Hoban Law Group

Hoban Law Group works alongside cannabis-specialized CPAs and tax counsel to help operators structure operations, document COGS allocations, and evaluate entity structures that legally reduce their 280E burden.

[Schedule a consultation](/consultation?source=insights&topic=280e-tax-strategy&matter_type=banking_280e) to discuss your current 280E position and planning opportunities.

Section 280E Tax Strategy for Cannabis