What 280E Means for Cannabis Businesses (And Why COGS Is Everything)
Sam's List Editorial | 2026-06-23
What 280E Means for Cannabis Businesses (And Why COGS Is Everything) A cannabis dispensary and a corner liquor store can earn the exact same profit and pay wildly different federal tax. The liquor store deducts its rent, payroll, and marketing like everyone else. The dispensary deducts almost none of it. That gap has a name: IRC Section 280E. If you run a dispensary or grow operation, 280E explained in one sentence is this — the federal government taxes you on gross profit, not net, because the product you sell is still federally controlled. Everything that follows is about the one door the code leaves open. 280E explained: why it exists and what it actually does Section 280E is short. It says no deduction or credit is allowed for a business that consists of "trafficking in controlled substances" listed in Schedule I or II of the Controlled Substances Act. Cannabis has lived on Schedule I for decades. So the IRS reads 280E literally: your dispensary is, in federal eyes, trafficking a controlled substance, and ordinary business deductions are off the table. Here's what that means in practice. The normal expenses every other business writes off — rent, employee wages, advertising, security, software, your accountant — are denied. Not reduced. Denied. This is the heart of why cannabis tax deductions get denied when nobody else's do. It isn't a penalty on your industry's profits. It's a refusal to let you subtract the costs of running it. The one channel 280E can't touch: cost of goods sold There's a constitutional floor. Congress can tax income, but cost of goods sold (COGS) isn't a deduction — it's part of how you calculate gross income in the first place. 280E denies deductions. It cannot deny COGS. So COGS becomes the entire game. Every legitimate dollar you move into COGS is a dollar that lowers your taxable base. Every dollar stranded as a denied operating expense gets taxed at full freight. Consider an illustrative example. Say a dispensary has $1M in revenue, $600K in product cost, and $300K in operating expenses (rent, payroll, marketing). A normal retailer pays tax on $100K of profit. The dispensary, under 280E, pays tax on $400K — because that $300K of operating expense is denied. Same economics, four times the taxable income. That is why a cannabis CPA spends more time on inventory accounting than almost anything else. How Section 471 actually governs your COGS This is where people get into trouble. COGS in cannabis isn't a vibe — it's a methodology, and the methodology is IRC Section 471 and its regulations. Section 471 is the inventory...
