For most businesses, there isn’t a single tax code provision they dwell on as the bane of their existence. But the cannabis industry isn’t like every other industry. It operates in a legal grey area and has its own unique tax hurdles (to put it diplomatically). For the uninitiated, IRC 280E bars cannabis businesses from deducting most operating expenses, instead taxing them on their gross profit. This code severely limits what cannabis operators can deduct. Even worse, it gives operators more work when it comes to the accounting side, just to make sure they are following all of the compliance and regulation mandates. 
How 280E Bleeds Operators
Unlike other industries, specifically the consumer goods sector, where C corporations typically face a 21% tax rate, the cannabis industry is taxed at rates ranging from 50% to 70%. This disparity in tax rates stems from the fact that cannabis companies are taxed at the Gross Profit line rather than Net Income. What does this mean? Generally, it means that cannabis companies cannot deduct General & Administrative expenses; instead, they can deduct only their Cost of Goods Sold.
But how alarming is this tax rate?
According to Holland and Hart tax attorneys, 280E is so financially taxing that it drives many operators out of business or pushes them toward the illicit market.
Further, as cannabis deductions are limited to COGS (Cost of Goods Sold), operators are generally unable to deduct rent, salaries, insurance, utilities, and other expenses due to cannabis’s federal Schedule I status.
As the Taxpayer Advocate puts it, operators can pay five times as much as non-cannabis ventures, in part because “marijuana-related businesses end up paying federal taxes on gross profit rather than net income.” This system is more costly for cannabis operators because gross profit leaves out many business expenses that would otherwise reduce taxable income.
The Fixes That Would Work: Proactive Measures
Yes, to put it bluntly, 280E sucks. It drains operators’ finances and often motivates them to pursue the illicit market instead. But there are, of course, options to remedy this situation. There are policy proposals that would loosen the chokehold 280E has on the industry without eliminating oversight. Let’s examine some of these proposals.
The most obvious proposal would be to reschedule cannabis as a Schedule III controlled substance. With this rescheduling, gone would be 280E and many of its manifold issues (for example, eliminating all of the deductions other businesses are entitled to). As exciting as this proposition is, Republican U.S. House lawmakers urged the DOJ and the president as recently as August 2025 to nix the idea of rescheduling.
Full legalization is also an option (and one that other countries have pursued, which didn’t result in them being razed to the ground with zonked-out citizens roaming the streets like some postapocalyptic hellscape). Legalization would undoubtedly be an attractive option for cannabis operators (and most of their citizens). Still, with the constant one-step-forward, two-steps-back mentality of cannabis policy in the U.S., we may be a ways off before we see this happen.
There is also the novel idea that the U.S. simply repeal 280E. However, given that this code potentially generates more revenue than the Fast and Furious franchise, repealing 280E may be even less likely to occur than rescheduling.
It’s worth noting that 22 states have already decoupled from 280E — that is, they have chosen not to abide by this tax code.
Surviving Until Reform
Entering the promised land (legalization, rescheduling, 280E repealed) will take time. Short and simple. How much time is anyone’s guess. In the meantime, cannabis operators can still structure their businesses to minimize the impact of 280E.
One way operators can lessen the sting is to categorize expenses as COGS scrupulously, delineate cannabis and non-cannabis activities into separate entities, and use complex structures such as Employee Stock Ownership Plans (ESOPs) to reduce tax burdens, as MBO Ventures, a business consulting firm specializing in tax-saving solutions for the cannabis industry, suggests.
There are other steps you can take to survive until reform day, e.g., ensuring your company doesn’t present red flags to the IRS that could result in a costly (or business-ending) audit. You can make sure you are abreast of all accounting changes related to cannabis on the docket for the year. You should stringently follow all compliance protocols and handle risk management like you are taking matches from a gorilla — that is, as carefully and thoughtfully as possible. And, of course, you should get involved with the legislative process whenever possible.
Conclusion
There are unpleasant but necessary evils in life, such as eating vegetables or visiting the dentist occasionally. We know we have to do these things, no matter how little joy they bring us. Many argue that 280E is detrimental to a nascent industry. It pushes businesses to go the illicit route just to survive. It would be incredibly easy to eliminate 280E, from rescheduling to legalization. And while these are tantalizing possibilities, they are like flying cars and world peace: perhaps someday, but not anytime soon. Thus, like bad exterminators always say, if you can’t kill the monster, you have to learn how to live with the beast. Take the steps you can to be financially organized, be meticulous with your record-keeping, and hire someone well-versed in cannabis tax strategy.
