§280E disallows every ordinary business expense except COGS. We allocate every dollar that legally belongs in COGS, structure your entity to limit §280E exposure, and elect §471(c) where you qualify. Aggressive but defensible.
§280E disallows deductions for any business trafficking in a Schedule I controlled substance. Until cannabis reschedules or §280E is repealed, the only escape is COGS. Most dispensaries leave 20-40% of legitimate COGS on the table because they do not allocate correctly.
§280E disallows every ordinary and necessary business deduction (rent, payroll, marketing, utilities) for a Schedule I trafficker. COGS survives because it is a return-of-capital, not a deduction. CHAMP and Olive v. Comm. confirm the boundary. Until DEA reschedules cannabis, this is the law.
IRC §280E; CHAMP 128 T.C. 173 (2007); Olive v. Comm. 139 T.C. 19For a retailer: COGS = invoice cost of product + freight in + necessary handling. For a producer: §471 (pre-TCJA) absorbed direct labor and a slice of indirect production costs. We allocate every defensible cost into COGS using §471 producer rules where you cultivate or process.
IRC §471(a); Treas. Reg. §1.471-3; §1.471-11If your average gross receipts are under $30M for 2024, you can elect §471(c) which treats inventory under your book method (or as non-incidental materials). This can pull more cost into COGS than the default rules. Patel Memo (IRS 2021) confirmed §471(c) is available to cannabis taxpayers.
IRC §471(c); Rev. Proc. 2023-34; CCA 202302011If you operate a dispensary AND a non-cannabis side (consulting, branded merchandise, real estate holding the building), each line must be a separate entity with separate books. CHAMP allowed deductions for the non-280E activity. We map your activities and rebuild the chart of accounts.
CHAMP 128 T.C. 173; Alterman v. Comm. T.C. Memo 2018-8316 legal-state jurisdictions (CA, CO, NY, NJ, IL, MA, MI, OR, WA, MN, MD, MT, MO, RI, VT, VA) have decoupled from §280E at the state level. Your state tax bill can be calculated normally even while federal disallows. We file the decoupled state return correctly.
CA R&TC §17209; NY Tax §612(c)(45); state-by-state conformity tableMost dispensaries still operate substantial cash. Form 8300 for cash receipts over $10K, FinCEN compliance, separate bank accounts for §280E and non-§280E entities, and IRS Cash Intensive Audit Technique Guide preparation. We get your records audit-ready before the notice arrives.
IRC §6050I; 31 USC §5331; IRS ATG Cash Intensive BusinessesSingle-location adult-use dispensary, $1.2M revenue 2024, vertically integrated with small cultivation. We elected §471(c), reallocated security, packaging, intake-to-shelf labor, and a slice of utilities into COGS under §471 producer rules, bifurcated their merchandise line into a separate non-280E LLC, and decoupled the state return.
$42,000 savedReduced taxable income through additional defensible COGS allocation. Non-cannabis merch line now deducts normally. State savings on top from decoupling. Position is documented and conservative enough to defend.