Cannabis Business Taxes: Section 280E, the Cost of Goods Sold That Survives It, and the Ancillary Company That Escapes It

Section 280E denies a business that traffics in a Schedule I or II controlled substance every deduction and credit except one: cost of goods sold, which is not a deduction but a reduction of gross receipts. Since April 28, 2026, marijuana subject to a state medical marijuana license has been in Schedule III, so the rule now reaches adult-use (recreational) marijuana businesses and years before the change; under transition guidance Treasury and the IRS have announced, a state-licensed medical business — every Florida treatment center among them — will generally be outside it for its full taxable year that includes that date. A dispensary still under 280E pays federal income tax on gross profit, not net profit — rent, payroll for the sales floor, marketing, insurance, and professional fees are all nondeductible. Growers fare better because more of their costs are inventory costs. Businesses that serve the industry without touching the plant are outside the rule entirely.

What Section 280E does

| Item | Plant-touching business under 280E | Ancillary business | |---|---|---| | Cost of goods sold | Allowed (reduces gross receipts) | Allowed | | Rent, utilities, insurance | Not deductible, except the portion properly in inventory cost | Deductible | | Wages | Production and inventory-handling wages in cost of goods sold; sales, management, and administrative wages not deductible | Deductible | | Marketing, professional fees, software, bank charges | Not deductible | Deductible | | Depreciation | Only on production assets, through inventory cost | Deductible | | Credits (research, work opportunity, and others) | Denied | Allowed | | Qualified business income deduction | Unsettled — no formal IRS guidance; wages disallowed under 280E do not count toward its wage limit | Allowed | | State taxes | Not deductible federally; state treatment varies | Deductible |

For a business still under the rule, the result is an effective federal rate on cash profit that can exceed 70 percent for a retailer. The 2026 change is partial: marijuana sold for adult use, and any marijuana not covered by a state medical license or an FDA-approved drug, remains in Schedule I; the 2024 proposal to move all marijuana to Schedule III is still pending after a DEA hearing in June and July 2026; and the promised Treasury guidance — including how a business with both medical and adult-use sales apportions its expenses — had not been issued as of early October 2026. Years before the change remain under 280E; the rescheduling order encouraged Treasury to consider retrospective relief, but none has been granted.

What cost of goods sold includes

For a business under 280E, Section 471 and its inventory regulations decide what goes into inventory cost. The Tax Court held in the Harborside case (Patients Mutual Assistance Collective Corp. v. Commissioner, 151 T.C. 176 (2018), affirmed by the Ninth Circuit in 2021) that a 280E business cannot use the uniform capitalization rules of Section 263A to pull more costs in, and IRS regulations issued in 2021 deny the same result under the small business inventory method of Section 471(c): costs that would otherwise be nondeductible stay out of inventory. In practice:

• Growers and processors capitalize direct materials, direct labor, and indirect production costs — the grow facility's rent and utilities, cultivation wages, nutrients, trimming, packaging, depreciation on grow equipment, and a share of production management. Most of a cultivator's cost base lands in inventory and is recovered as product sells.
• Retailers capitalize the purchase price of product and the transportation to get it in the door, and little else. The sales floor, the budtenders, the security, and the point-of-sale system are nondeductible.
• Vertically integrated operators must allocate between the two sides with records that support it.

An operator that tries to recharacterize retail costs as inventory costs loses — in Harborside, a dispensary that argued its handling of the bud it bought made it a "producer" was held to be a reseller — and the Tax Court has upheld accuracy-related penalties against cannabis businesses with poor records or unsupported positions.

Entity choice under 280E

Under 280E, a pass-through entity passes the inflated taxable income to its owners, who pay personal rates on profit they never received in cash. A C corporation pays 21 percent on the same inflated income, and the owners are taxed only on actual dividends — which, combined with the lower corporate rate, is why many plant-touching businesses are C corporations despite the double tax. A separate entity for the real estate, leased to the operation, converts nondeductible rent paid by the dispensary into taxable but deductible-against-expenses income in the property company. The lease must be at market and the entities genuinely separate. For a medical licensee outside 280E from 2026, the operator deducts the rent itself, and the entity choice returns to the ordinary C-versus-S comparison.

Cash, banking, and payroll

Federal banking restrictions leave many operators handling cash. Every cash receipt above $10,000 in one or related transactions must be reported on Form 8300 within 15 days; structuring to avoid it is a federal crime. Payroll taxes must generally be deposited electronically; the IRS accepts cash payments by appointment at some Taxpayer Assistance Centers, but operators without a bank account often rely on money service businesses or state-chartered institutions at a cost. Employees are employees — putting budtenders or cultivation staff on contractor agreements is a worker-classification problem, not a 280E planning tool.

State conformity

Florida permits medical marijuana only, licensed through a limited number of vertically integrated treatment centers — each holding a state medical marijuana license, which has put its marijuana in Schedule III since April 28, 2026. Florida's corporate income tax starts from federal taxable income and has no 280E adjustment of its own, so it follows the federal result: a Florida C corporation operator paid state tax on the inflated base for years under 280E, and can expect ordinary deductions for 2026 under the planned transition rule. Several other states have decoupled, allowing full deductions for state purposes — still important for their adult-use businesses. Florida sales tax does not apply to medical marijuana or marijuana delivery devices dispensed under the program.

The ancillary business

A company that sells lighting, software, packaging, security, consulting, accounting, or real estate to the industry does not traffic in a controlled substance and deducts its expenses normally — provided its income is not a share of the cannabis business's sales and it does not take possession of product. A landlord leasing to a dispensary is ancillary; a management company whose fee is a percentage of dispensary revenue is at the edge; a "consulting" company that is really the operator's own expenses relabeled is inside 280E.

Worked example. A dispensary has $3 million of sales, $1.5 million of product purchases and inbound freight (cost of goods sold), and $1 million of operating expenses — rent, wages, security, marketing, fees. Its cash profit is $500,000. Under 280E — an adult-use store, or any store in a year before the change — its federal taxable income is $1.5 million, because the $1 million of operating expenses is nondeductible. As a C corporation it pays $315,000 federal tax, and in a state that taxes corporations as Florida does (5.5 percent of federal taxable income above a $50,000 exemption) about $80,000 of state tax — roughly 79 percent of cash profit. Under a state medical license, the planned transition rule lets it deduct the $1 million for all of 2026: taxable income falls to $500,000, federal tax to $105,000, and Florida tax to about $25,000 — roughly 26 percent of cash profit. The owners form a separate LLC to own the building and charge the dispensary $200,000 of rent; under 280E the dispensary cannot deduct it, but the LLC deducts its own mortgage interest, depreciation, and property tax against the rent it receives. Once 280E no longer applies, the dispensary deducts the rent too, and the LLC is a liability and estate-planning choice rather than a 280E workaround.

Official sources

The rescheduling order states: “The Administrator further notes that, as a consequence of this rule, holders of state medical marijuana licenses will no longer be subject to the deduction disallowance imposed by Section 280E of the Internal Revenue Code, which applies only to businesses engaged in “trafficking in controlled substances . . . in a schedule I or II,” 26 U.S.C. 280E.” — Drug Enforcement Administration, Schedules of Controlled Substances: Rescheduling of Food and Drug Administration Approved Products Containing Marijuana From Schedule I to Schedule III; Corresponding Change to Permit Requirements, https://www.federalregister.gov/documents/2026/04/28/2026-08176/schedules-of-controlled-substances-rescheduling-of-food-and-drug-administration-approved-products

The IRS explains: “Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.” — Internal Revenue Service, Cannabis industry frequently asked questions, https://www.irs.gov/businesses/small-businesses-self-employed/cannabis-industry-frequently-asked-questions

Florida's Office of Medical Marijuana Use explains: “Licensed medical marijuana treatment centers (MMTCs) are the only businesses in Florida authorized to cultivate, process and dispense low-THC cannabis and medical marijuana.” — Florida Department of Health, Office of Medical Marijuana Use, Home - Office Of Medical Marijuana Use, https://knowthefactsmmj.com/

Related guides

• When a C Corporation Beats an S Corporation
• Inventory for Tax: FIFO, LIFO, and the Small Business Rule
• Renting Property to Your Own Business: The Self-Rental Rule
• Payroll Tax Penalties: The Mistakes That Cost the Most
• Cannabis Entity and Estimated Taxes: The C Corporation Many Operators Choose, the Property Company, and the Quarter You Pay Tax on Profit You Never Saw

Next step

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