What is Section 280E?
Section 280E is a provision of the Internal Revenue Code that prohibits businesses from deducting ordinary and necessary business expenses if they traffic in controlled substances listed in Schedule I or Schedule II of the Controlled Substances Act. Enacted in 1982, this section applies to all cannabis businesses regardless of state legal status, since cannabis remains a federally controlled Schedule I substance. While Section 280E denies deductions for expenses like rent, advertising, salaries, and other ordinary costs under Section 162, it does permit Depreciation and amortization of production assets as part of the cost of goods sold under Section 471. This results in effective tax rates that often exceed 70% for profitable cannabis operations. Strategic planning through proper inventory accounting methods, S Corporations for business structure segregation, and comprehensive documentation becomes essential for cannabis businesses to minimize the impact of Section 280E restrictions.
.png){kind=small}