banking tax
Cannabis Banking & 280E Tax
Specialized counsel on federal tax strategy under IRC § 280E, cannabis banking access, financial structuring, and the real cost of operating in a cash-intensive regulated industry.
Cannabis Banking & 280E: The Financial Law No One Else Handles
No area of cannabis law has more direct impact on your bottom line than banking and federal tax. Section 280E of the Internal Revenue Code disallows deductions for businesses trafficking in Schedule I controlled substances — which means most cannabis operators pay federal income tax on gross profit, not net income. The result is effective tax rates of 50–70% for profitable operators.
Hoban Law Group's tax and banking practice works at the intersection of cannabis law, federal tax law, and financial structuring. We help clients minimize the 280E burden legally and navigate the patchwork of banking access available to cannabis businesses.
Section 280E: The Core Challenge
Section 280E does not disallow cost of goods sold (COGS). This distinction is the foundation of every legitimate 280E planning strategy. By maximizing COGS through proper allocation of direct costs and by structuring business operations to separate plant-touching from non-plant-touching activities, operators can reduce their effective tax burden significantly.
Our approach:
- Detailed COGS analysis and optimization
- Business structure analysis for plant-touching/ancillary separation
- Review of accounting methods for 280E compliance
- Coordination with cannabis-specialized CPAs
- Representation in IRS audits and 280E disputes
Cannabis Banking: Navigating the Access Gap
Despite FinCEN guidance from 2014, most national banks still do not serve cannabis businesses. Our banking practice helps clients:
Find Compliant Banking: We maintain relationships with cannabis-friendly credit unions, state-chartered banks, and cannabis-specific financial services firms that can provide deposit accounts, merchant processing, and limited lending.
Structure Compliant Operations: FinCEN-compliant cash management, internal controls, and documentation practices that satisfy the Suspicious Activity Report (SAR) requirements that cannabis-serving banks must file.
Cannabis-Specific Lending: We advise on the limited cannabis lending market, including equipment financing, real property lending, and private credit alternatives.
Representative Matters
280E Audit Defense — $2.3M Assessment
Successfully defended cannabis retailer in IRS 280E audit, reducing a $2.3M assessment by 67% through COGS documentation, allocation methodology defense, and negotiated settlement.
Multi-Entity Tax Structure for MSO
Designed multi-entity structure for multi-state operator to legally separate plant-touching operations from non-plant-touching management and IP holding entities, reducing effective 280E tax burden.
Banking Access Program for Vertically-Integrated Operator
Identified and facilitated banking relationships for vertically-integrated operator previously operating cash-only, including accounts for cultivation, processing, and retail entities across two states.
Representative Matters
Cannabis Banking: Structuring IRC 471(c) Small Business Inventory Accounting for Tax Optimization
Advised a cannabis MSO on adopting IRC 471(c) simplified inventory accounting, reducing effective tax rate by restructuring COGS methodology within 280E constraints.
280E IRS Audit Defense: $2.1M Assessment Reduced for Multi-Location Dispensary
Defended a multi-location dispensary chain through an IRS examination targeting Section 280E disallowances, reducing the proposed assessment by 63%.
Related Insights
Frequently Asked Questions
- Is 280E going away with federal legalization?
- Section 280E is a federal tax provision that applies because cannabis remains a Schedule I controlled substance under the Controlled Substances Act. If cannabis is rescheduled to Schedule III (as the DEA has proposed) or legalized federally, 280E would no longer apply. Until that happens, 280E remains the law, and operators must plan accordingly.
- What is the most effective legal strategy for reducing 280E exposure?
- The most effective legal strategies involve maximizing cost of goods sold through proper cost allocation, structuring business operations to separate plant-touching from non-plant-touching activities, and ensuring proper accounting methods. The IRS scrutinizes cannabis 280E returns heavily, so documentation is critical.
- Can cannabis businesses get merchant processing for credit cards?
- Credit card processing for cannabis sales remains difficult. While some processors operate in the space, many use workarounds that carry legal risk. Compliant options are limited but growing. We advise clients on the landscape and help identify processors operating within legal and card network guidelines.
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