280E

Internal Revenue Code §280E, enacted in 1982 following Edmondson v. Commissioner, prohibits any deduction or credit for a trade or business "trafficking in controlled substances" in Schedules I or II of the Controlled Substances Act. Because marijuana remains Schedule I, state-licensed cannabis operators cannot deduct ordinary business expenses (rent, payroll, marketing, utilities, depreciation, interest) on federal returns, producing effective federal tax rates of 60–80%+. The Tax Court in Californians Helping to Alleviate Medical Problems (CHAMP) v. Commissioner (128 T.C. 173, 2007) held §280E does not disallow Cost of Goods Sold, because COGS is a constitutionally required adjustment to gross receipts under the 16th Amendment. Cultivators and manufacturers can allocate substantially more indirect costs to inventory under IRC §471 than retailers can. Subsequent cases (Olive, Alternative Healthcare Advocates, Loughman, Harborside) have largely sided with the IRS. At least 22 states have decoupled from §280E for state income tax. As of April 2026, §280E continues to apply — no final DEA rule rescheduling cannabis to Schedule III has been published, and the IRS has warned operators not to file refund claims premised on rescheduling. Rescheduling would automatically eliminate §280E. → See also: Banking, Rescheduling (Part 6), Schedule I (Part 6)