Tax Code Section 280E

Section 280E of the U.S. Internal Revenue Code prohibits businesses involved in drug trafficking from deducting expenses related to their operations, except for the cost of goods sold (COGS). This means that while a legal cannabis business can deduct the direct costs of producing their product, they cannot deduct typical business expenses like rent, salaries, or marketing. As a result, cannabis businesses often face significantly higher taxable income and tax burdens compared to other legal businesses, because only their inventory costs are deductible. This provision was initially aimed at illegal drug businesses but also applies to federally illegal substances like cannabis.