Regulatory and Industry News Alerts from Armanino

Cannabis Companies Can Deduct Business Expenses in States That Exclude the 280E Tax Code

by Mike Goral
February 06, 2023

Depending on where your cannabis business operates, you may enjoy a big tax relief. Several U.S. states have decoupled Internal Revenue Code 280E (IRC 280E) from their state tax codes so that cannabis operators will be able to deduct business expenses on their state taxes. The change means that marijuana operators in certain states will have a less hefty tax obligation and the opportunity to reinvest revenue into their businesses.

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 taxable income.

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.

If you need assistance determining compliance with current laws and regulations in the states where you operate a cannabis business, contact our cannabis industry experts.You can use snippet to insert predefined blocks of HTML.

Julian Donnelly and Chelsea Natale contributed to this article.

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Related News and Insights
How a Cannabis Company Built an Accounting Framework to Support Future Growth
Case Study
A robust accounting system helped streamline operations, get visibility across 35 entities and meet lender requirements.

March 13, 2023
Financing or Sale Options for Cannabis Operators
What’s next for your cannabis business?

March 1, 2023 | 10:30 AM - 11:30 AM PT
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.

December 27, 2022