IRC Section 280E
Federal tax code provision that bars cannabis operators from deducting ordinary business expenses, creating effective tax rates often above 70%.
Definition
IRC Section 280E is the U.S. Internal Revenue Code provision enacted in 1982 that prohibits any business 'trafficking in controlled substances' under federal law from deducting ordinary business expenses such as rent, payroll, marketing, and utilities. Because cannabis remains a Schedule I substance federally, every state-licensed cultivator, processor, and retailer in the U.S. is subject to 280E — even when operating in full compliance with state law. Operators may only deduct Cost of Goods Sold (COGS), which is why cannabis MSOs report effective tax rates between 50% and 90%+ on a federal basis, far above the 21% corporate statutory rate.
Also known as: Section 280E, Internal Revenue Code 280E
Why It Matters for Investors
280E is the single largest structural drag on U.S. cannabis cash flow. Repeal or relief — through Schedule III rescheduling, descheduling, or judicial action — is the most-watched catalyst for the entire sector. Investors model 280E impact directly into free cash flow and enterprise value, and any rescheduling event would re-rate U.S. MSOs materially upward.
Examples in Practice
- A dispensary with $20M revenue and $14M in operating expenses might owe federal tax on $18M+ of taxable income — not $6M — because only the $2M in COGS is deductible.
- Cresco Labs (CRLBF), Trulieve (TCNNF), and Curaleaf (CURLF) have each disclosed 280E-attributable tax expense in 10-Q filings.
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