Internal Revenue Code Section 280e: What It Means for Cannabis Operators

April 23, 2024
May 18, 2023
| Updated
August 3, 2023

Most businesses can usually deduct day-to-day expenses from their gross revenue, which reduces the tax they pay. Eligible expenses include things like depreciation, vehicle maintenance and gas, internet, and electricity. Having the freedom to make these write-offs and save tax dollars is a perk that many owners don't think twice about. Unfortunately, cannabis business owners aren't among them.

Cost of goods sold is the only expense that cannabis businesses are eligible to deduct. So, as a cannabis business operator, you'll pay much more tax than you would in any other industry. This frustrating reality is purely based on government technicality under the 280e tax code.

What is the 280e tax code?

Section 280e is part of the Internal Revenue Code. It states that deductions on any amount are not allowed “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”

This means that ordinary business expenses can't be deducted from any gross income earned from moving certain substances. These substances are defined by the Controlled Substances Act under its Schedule I or II.

Despite being completely legal in many US jurisdictions, cannabis is still listed under Schedule I. So, the IRS has applied Section 280e to state-legal cannabis businesses. These operators are caught in the technicality's crossfire, enduring strict tax implications.

Where the 280e tax code came from

280e originated during Reagan's administration. It began with a 1981 court case where a convicted cocaine trafficker exercised his right, under federal tax law, to deduct normal business expenses. The next year, Congress implemented the new tax code so other drug dealers wouldn't benefit in the same way.

Today, nearly half of all US states have legalized marijuana in some way. So, 280e's impact has been much stronger on state-regulated cannabis businesses than on the illegal drug dealers it was meant to punish. But what does this mean for you?

What the 280e tax code means for cannabis operators

As a cannabis operator, your biggest financial hurdle will likely be federal taxes, thanks to 280e. This means you'll need to take compliance seriously, even before opening up shop. The last thing you need is IRS penalties in addition to hefty tax bills.

On top of this, 280e is full of notes, technicalities and exceptions to consider – not unlike other tax codes. Yet, not much definitive guidance and information exists about what can and can't be done.

So, it's crucial to know exactly how to structure your business in a way that minimizes tax implications from the code. This could make all the difference between a profitable and unsuccessful business in the future.

As well, engaging the right professionals and technology goes a long way in managing 280e and its financial effect.

Speak to a cannabis accountant long before you start operations

To best navigate the 280e code and its many nuances, you should work directly with an accountant that specializes in the cannabis sector. They'll have a full, detailed picture of the tax restrictions and implications affecting your business and how you can reduce them.

The code's technicalities and their impact on you are highly dependent on your business structure and expense categories. So, involving a cannabis accountant in your business planning well before you've launched could save you a lot on taxes – potentially hundreds of thousands of dollars.

Here at Distru, we usually prefer to give direct, actionable advice. The thing about 280e, though, is it's far too nuanced to do this in a way that applies to everyone. Instead, it's best to consult with a professional cannabis accountant about your specific situation.

Leverage technology to stay compliant

Compliance is a huge part of the cannabis world and is often dreaded by operators. Between track and trace and tax laws, including 280e, maintaining compliance can be stressful and time-consuming.

The great news is technology can make a huge difference. For example, by using a cannabis ERP like Distru, you can save loads of time and effort every week. Our integrations let you connect the platforms that matter most to your business and its daily operations. These include Quickbooks for bookkeeping, Metrc for track and trace, and LeafLink for purchasing and sales.

This means you won't waste time with things like extra or manual data entry, switching between programs and contexts or recovering forgotten passwords. When you combine the right business structure from your accountant with the right technology –  like a one-stop cannabis ERP platform –  managing and simplifying compliance is easy.

Learn more about 280e

For more information on 280e, check out resources from Bloomberg, Cornell Law School and the IRS.

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