What 280E Means for Cannabis Businesses (And Why COGS Is Everything)

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 accounting rule that defines which costs get capitalized into the value of your product and which don't. The IRS has been explicit that cannabis businesses generally apply the pre-2018 471 rules, because the more generous capitalization rules under Section 263A are themselves treated as deductions that 280E blocks.

Translation: you don't get to dump marketing and front-of-house payroll into COGS just because it would help your tax bill. 471 has a list, and you stay on it. The goal is dispensary COGS rules applied correctly — defensible, documented, and boring. Boring survives an audit.

Why a grower and a dispensary get treated differently

Not all cannabis businesses sit in the same spot. 471 draws a line between resellers and producers, and that line decides how much you can capitalize.

• Dispensaries are resellers. Under 471, a reseller's COGS is basically the invoice price of the product plus the cost of getting it in the door — freight, and a narrow set of acquisition costs. That's it. The bulk of a retail operation's spend stays denied.
• Cultivators and processors are producers. Producers make inventory, so 471 lets them capitalize far more: direct materials, direct labor, and a range of indirect production costs like the utilities, rent, and equipment depreciation tied to the grow. More of the cost base legitimately becomes COGS.

That's not a loophole — it's the structure of inventory accounting. It's also why a vertically integrated operator and a pure retailer need very different tax strategies, and why your books have to track which hat each entity is wearing.

One more wrinkle worth knowing: Section 471(c) gives small businesses (those under the gross-receipts threshold, $30M-ish averaged over three years — confirm the current figure) an alternative inventory method based on their books. Some cannabis operators have used it to capitalize more aggressively. The IRS doesn't love it, the case law is unsettled, and "aggressive" is exactly the word that draws scrutiny.

280E and cannabis in 2026: what's changing, and why "conservative" wins

You may have heard cannabis is being rescheduled. Partly true, and the nuance matters for your tax bill.

In April 2026, the DOJ moved certain FDA-approved marijuana products and state-licensed medical cannabis to Schedule III. Schedule III is not Schedule I or II — so 280E, by its own text, would stop applying to businesses that fall under that reclassification. That's potentially enormous.

But it's narrow. Recreational and adult-use cannabis, bulk material, and unlicensed activity remained on Schedule I as of that order, with a broader rescheduling hearing scheduled for mid-2026. For most adult-use dispensaries, 280E still applies right now.

So the move is: don't bet your filing on a headline. Confirm exactly where your specific business falls today, with a CPA who tracks this weekly — because the answer changed this year and may change again.

Find a cannabis CPA who actually lives in 280E

280E punishes guesswork. The difference between a defensible COGS position and an aggressive one is the difference between a clean return and an audit you lose — and on a 280E business, losing an audit is brutal because the denied deductions stack up fast.

Anomaly CPA works with cannabis and other complex, high-tax businesses where the cost of a generalist's mistake is measured in six figures. They build COGS the way 471 actually requires — documented, entity-aware, and ready to defend — and they track the rescheduling shifts that decide whether 280E even applies to you this year.

Read Anomaly CPA's verified reviews on Sam's List, then book an intro call. Bring your P&L and your entity structure. If you're a producer being taxed like a reseller — or a reseller being told you can capitalize like a producer — that first conversation usually pays for itself.