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What Is IRS 280E and Why Does It Increase Cannabis Taxes?
IRS Code §280E prevents cannabis businesses from deducting ordinary operating expenses, increasing taxable income and federal tax burden.
What This Page Covers
- What IRS 280E is
- Which expenses cannot be deducted
- How taxable income is calculated
- A real calculation example
What IRS 280E Does
Section 280E of the Internal Revenue Code states:
Businesses trafficking in Schedule I or II controlled substances may not deduct ordinary and necessary business expenses.
Cannabis remains Schedule I federally.
This triggers 280E.
What You Can Deduct
Cannabis businesses may deduct:
Cost of Goods Sold (COGS)
COGS includes:
- Inventory purchase costs
- Certain production-related expenses
Operating expenses are not deductible.
Calculation Example
Revenue: $3,000,000
COGS: $1,800,000
Operating expenses: $900,000
True profit: $300,000
Under normal tax rules:
Taxable income = $300,000
Under 280E:
Taxable income = $1,200,000
Federal tax at 21%:
$1,200,000 × 21% = $252,000
Tax is calculated on gross profit, not net profit.
Why This Affects Cash Flow
Because taxes are based on gross profit:
- Effective tax rates appear higher
- Quarterly estimated payments increase
- Cash reserves must be larger
Related Pages
- Why Cannabis Businesses Struggle With Banking and Payments
- What is Cashless ATM?
- Why Can’t Dispensaries Use Credit Cards?
- Can Dispensaries Use ACH Payments?
- Why Are Cannabis Merchant Fees 4–7%?
- What Is IRS 280E and Why Does It Increase Cannabis Taxes?
- Why IRS 280 Drains Your Bank Account
