How Does Section 280E of the Tax Code Affect My Cannabis Business?

Under federal law, it remains a crime to grow, transport or sell marijuana. Section 280E applies to cannabis companies as long as marijuana is listed as a Schedule I controlled substance, and it prevents cannabis operators from being able to deduct certain ordinary and necessary business expenses — such as rent or employee compensation — for federal taxation purposes. This can result in a significantly higher tax bill for cannabis operators since they are only able to deduct cost of goods sold (COGS) from gross receipts when calculating federal

Providing Resources to Help Cannabis Business Owners Successfully Navigate Unique Tax Responsibilities | Internal Revenue Service

Take a closer look at how IRS is working to positively impact filing, payment and reporting compliance on the part of all businesses involved in the growing, distribution and sales of cannabis/mari...

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How Are States Alleviating the Burden of IRC 280E?

Some states have implemented state-level tax codes that allow legal cannabis businesses to deduct certain business expenses, essentially decoupling from IRC 280E. As the cannabis industry grows and public opinion in favor of legalization increases, additional states are taking this approach.

Which States Have Decoupled From IRC 280E?

Virginia, Massachusetts, Missouri and Maryland are among recent states to exclude the 280E tax code. The following states have implemented some form of tax code decoupling from IRC 280E:

• Arkansas

• California

• Colorado

• Hawaii

• Louisiana

• Maryland

• Massachusetts

• Maine

• Michigan

• Minnesota

• Mississippi

• Missouri

• Montana

• New Mexico

• New York

• Oregon

• Texas

• Vermont

• Virginia

The remaining states — including those that have not established a legal framework for recreational or broad-medicinal-use cannabis — and the District of Columbia have not yet implemented any state-level tax codes allowing ordinary business deductions. Cannabis companies in those states face the full impact of IRC 280E on both their federal and state income tax bills.

Federal lawmakers have previously discussed the possibility of excluding cannabis businesses from 280E entirely; however, a bill has not been passed. For now, cannabis businesses must continue to navigate the effects of 280E from state to state.

Preparing Your Cannabis Business for Adult-Use Sales After Legalization in Missouri and Maryland

Understand the legislation’s potential impact on medically licensed dispensaries and three key ways to get ready.