Complex Tax Issues
Cannabis Tax Issues
Navigate 280E. Stay Profitable.
Cannabis businesses operate under some of the most punitive tax rules in the code. Section 280E disallows most business deductions, creating effective tax rates of 70%+. We help cannabis operators minimize the damage and stay compliant.
Sam Brotman, J.D., LL.M.Key Takeaway
Section 280E denies cannabis businesses most ordinary business deductions, creating effective tax rates above 70%. The only legal path to lower taxes is aggressive cost-of-goods-sold strategies and smart entity structuring.
280E Makes Cannabis the Most Overtaxed Industry in America.
Section 280E of the Internal Revenue Code prohibits businesses that traffic in controlled substances from deducting ordinary business expenses. Since marijuana remains a Schedule I substance under federal law, cannabis businesses can only deduct cost of goods sold — everything else (rent, payroll, marketing, utilities) is non-deductible.
The result is effective tax rates that can exceed 70% of net income. Without proper tax planning, many cannabis businesses are paying far more than they should — even under 280E's harsh rules.
We help cannabis operators maximize their cost of goods sold allocations, structure their entities to minimize 280E impact, and defend against IRS audits that specifically target the cannabis industry.
From Our Practice
We've worked with cannabis operators across California who were paying effective tax rates above 70% due to Section 280E. Our approach combines aggressive cost-of-goods-sold strategies with entity structuring to minimize the 280E impact — legally and defensibly.
What We Handle
Cannabis Tax Services
280E Tax Planning
We structure your cannabis business to maximize allowable COGS deductions under 280E — the single most impactful strategy for reducing your effective tax rate.
IRS Audit Defense
Cannabis businesses face higher audit rates. We defend against IRS examinations that challenge your COGS calculations, entity structure, and reported income.
Entity Structuring
Separating cannabis and non-cannabis activities into distinct entities can shield non-trafficking income from 280E restrictions. We design compliant structures that minimize your tax burden.
California Cannabis Tax
California imposes excise taxes, sales taxes, and local taxes on cannabis in addition to income tax. We handle compliance and disputes with the CDTFA and FTB.
COGS Optimization
Under 280E, cost of goods sold is the only deduction available. We ensure your COGS calculation captures every allowable cost — direct and indirect — using IRS-approved methodologies.
Tax Debt Resolution
Cannabis businesses often accumulate tax debt due to 280E's high effective rates. We negotiate installment agreements and other resolution options with the IRS and state agencies.
Understanding 280E
Cannabis Tax: What Operators Need to Know
What is Section 280E?
Section 280E was enacted in 1982 to prevent drug dealers from deducting business expenses. It provides that no deduction or credit shall be allowed for any amount paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances.
Since marijuana remains a Schedule I controlled substance under federal law, 280E applies to all state-legal cannabis businesses. The only exception is cost of goods sold, which is a reduction to gross income — not a deduction — and therefore not blocked by 280E.
How do I maximize COGS under 280E?
The key is proper cost allocation methodology. For cultivators, many costs (labor, supplies, facilities) can be allocated to COGS under IRC 263A uniform capitalization rules. For retailers, COGS is generally limited to the purchase price of inventory. For vertically integrated operators, proper allocation between cultivation, manufacturing, and retail is critical.
We design cost accounting systems that capture every allowable cost in COGS using IRS-approved methodologies that withstand audit.
Can I separate my cannabis and non-cannabis businesses?
Yes — and this is one of the most powerful 280E planning strategies. If you operate non-cannabis activities (management services, real estate, IP licensing, consulting) through a separate entity, those activities may not be subject to 280E and can deduct expenses normally.
The structure must be legitimate — the IRS scrutinizes related-party arrangements in the cannabis industry. We design structures that are both tax-efficient and defensible.
Will 280E ever go away?
The DEA's marijuana rescheduling process could potentially move marijuana to Schedule III, which would eliminate 280E's application. However, the timeline and outcome remain uncertain. We monitor developments closely and plan for multiple scenarios.
Until 280E changes, aggressive tax planning is the only way to maintain profitability in the cannabis industry.
Talk to a Tax Attorney
Not Sure Where You Stand?
Schedule a free 15-minute call. We'll assess your situation, outline your options, and tell you exactly what to expect — no obligation.
Book Your Free Callor call (619) 378-3138
Why Brotman Law
Cannabis Tax Attorneys Who Understand Your Industry
280E Expertise
We know 280E inside and out — the statute, the regulations, the case law, and the IRS's audit approach to cannabis businesses.
Industry Experience
We work with cultivators, manufacturers, distributors, retailers, and vertically integrated operators across California.
COGS Maximization
Our cost allocation strategies capture every allowable dollar in COGS, reducing your effective tax rate as far as the law allows.
IRS Audit Defense
Cannabis audits are frequent and aggressive. We've defended operators and know exactly what the IRS targets.
State Tax Coordination
We handle both federal 280E issues and California's complex cannabis tax regime — excise tax, sales tax, and income tax.
Rescheduling Monitoring
We track marijuana rescheduling developments and plan strategies that position your business for multiple outcomes.
Learn More
Cannabis Tax Guides & Resources
Free Tax Resources
Guides to cannabis tax planning and 280E compliance.
Read the Guide → Free GuideCalifornia Sales Tax
Cannabis businesses face unique California sales tax obligations and CDTFA scrutiny.
Read the Guide → Free GuideBusiness Tax Optimization
For non-cannabis business activities that can be structured outside of 280E.
Read the Guide →
