Skip to main content
Ask five cannabis CPAs about 280E tax deduction strategies for dispensaries and you'll get five answers. One of them survives an audit. Section 280E blocks dispensaries from deducting ordinary business expenses like rent, marketing, and most payroll, because cannabis is still Schedule I federally. The one thing Congress never took away is cost of goods sold. Every legitimate strategy still standing is really a better way to calculate and document COGS. The two-entity structures, the management fee arrangements, the clever reallocations: most of that already lost in Tax Court.
280E is narrow on purpose. It disallows deductions and credits for any business trafficking in a controlled substance, with a carve-out for cost of goods sold, because COGS functions as an adjustment to gross income rather than a deduction. For a dispensary that means inventory costs: what you paid the distributor, inbound freight, and certain costs of getting product ready to sell under IRC 471 and 263A. The budtender's hourly wage, your Google ads spend, the lease on the front of house. All of that sits outside the exception unless you can prove it's genuinely part of production.
The CHAMP case from 2007 let a California caregiving organization split itself into two trades, one taxable dispensary activity and one non-taxable caregiving service, and deduct the caregiving side separately. Consultants have been selling variations on that idea for fifteen years. It rarely applies cleanly to a retail dispensary with one storefront and one register, because the IRS and the courts look at whether the two activities operate separately in practice. An org chart doesn't settle it.
Harborside went bigger, arguing that nearly everything the business spent money on counted as cost of goods sold, on the theory that without it there'd be no inventory to sell. The Ninth Circuit upheld the Tax Court and shut that down. COGS still has to follow standard inventory costing rules. Alterman and Gibson took a similar swing, claiming allocations without the receipts to back them up, and most of it got disallowed. So when a consultant pitches you a structure that somehow runs marketing spend through a side LLC, ask whether that theory has been tested. Odds are it has.
There's no loophole left. There's rigor. The operators keeping the most income out of 280E's reach are the ones properly capitalizing indirect production costs into inventory under 263A: a share of facility costs tied to receiving and storing product, the labor in trimming, packaging and QC if you're vertically integrated, inbound transportation. None of it is exotic. It's tedious accounting most retailers skip because the payoff shows up a year later on a tax return instead of in this week's sales number.
I've sat in a back office in March watching a GM and a CPA argue over whether a trimmer's wages belonged in COGS, because nobody categorized the role correctly when that person was hired in July. Eight months of reconstruction from memory and a spreadsheet. That hour cost more than the deduction was worth. Categorize the cost once, at the source.
Most of the damage happens at the register. The tax return is just where you find out. If your point of sale lumps flower, accessories, delivery fees and discounts into one undifferentiated sales number, your accountant rebuilds your cost structure from scratch every quarter on guesswork. Retail Analytics that tracks cost at the SKU level, by category, hands your preparer something they can defend under examination.
The other gap is the one between systems. If someone on your team manually reconciles accounting software against the POS every month, there's a seam there, and an auditor will find it before you do. Integrations between your POS and your accounting stack close it well before April.
Can a dispensary deduct payroll under 280E? Only the portion tied directly to production, like cultivation or trimming labor that gets capitalized into inventory cost. Budtender wages, management salaries and most back-office payroll don't qualify.
Does running a non-plant-touching side business help with 280E? It can, if the books are genuinely separate. Branded apparel or a consulting arm can sit outside 280E when the revenue, expenses and accounting stay apart from the dispensary's. Commingled books won't survive a look from the IRS.
Will 280E go away if cannabis gets rescheduled? Moving to Schedule III would remove the trafficking language that triggers 280E, which is why the industry watches that docket so closely. Until it's final, plan around the rules as they stand today.
If you're changing systems anyway to get cleaner cost data, do it once and do it right. Here's what migrating to Treez actually involves.
