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VapeHeatLabSection 280E
A US tax code provision that prohibits cannabis businesses from deducting standard business expenses on federal taxes.
Section 280E is a provision of the US Internal Revenue Code that prohibits businesses trafficking in Schedule I or II controlled substances from deducting normal business expenses on their federal tax returns. Because cannabis remains federally classified as Schedule I, legal cannabis businesses face effective tax rates of 40% to 70%, far higher than comparable businesses in other industries.
How 280E Impacts Cannabis Businesses
Under normal tax law, businesses deduct expenses like rent, employee wages, marketing, and utilities from their gross income before calculating taxes. Section 280E denies these deductions to cannabis businesses, meaning they pay taxes on their gross profit rather than net income. A cannabis dispensary earning $1 million in revenue with $600,000 in expenses would pay taxes on the full $1 million rather than the $400,000 net profit. The only deduction allowed is cost of goods sold (COGS), which covers the direct cost of the cannabis products themselves.
Potential for Change
If cannabis is rescheduled from Schedule I to Schedule III (as proposed in 2024), 280E would no longer apply, saving the cannabis industry billions in tax burdens. This single change would dramatically improve profitability for legal operators, potentially lowering consumer prices and making it easier for legal businesses to compete with the illicit market. Some cannabis companies have challenged 280E in court, with limited success. Until scheduling changes are finalized, 280E remains one of the most significant regulatory burdens on the legal cannabis industry.