What the Statute Says
The provision denies deductions and credits for amounts paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances within the meaning of Schedule I or II of the federal Controlled Substances Act. State legality does not change the federal analysis on its own.
Why Cost of Goods Sold Survives
Gross income is receipts less cost of goods sold. Because COGS reduces gross income rather than functioning as a deduction, it remains available. That is why inventory accounting is the central discipline of cannabis tax practice: what is properly inventoriable determines taxable income.
- Deductions below the gross income line are generally disallowed
- Producers may capitalize a broader set of production costs than resellers
- Documentation determines whether a position can be sustained
Producer Versus Reseller
A cultivator or manufacturer capitalizes direct materials, direct labor and defined indirect production costs. A retailer's inventoriable costs are narrower, typically limited to the cost of acquiring goods and certain acquisition-related costs. Vertically integrated license holders must apply both frameworks inside one set of books, which requires careful segregation.
Building a Defensible Methodology
A methodology is defensible when it is written down, applied consistently, supported by contemporaneous records and reconciled to the tracking system. Reconstructing allocations after year end, or changing methodology whenever it is convenient, undermines the position regardless of technical merit.
- Written methodology memo updated annually
- Allocation schedules with documented drivers
- Time and payroll records tagged by function
- Inventory reconciliations retained with the workpapers
A Note on Change
Federal scheduling, litigation and legislative proposals continue to develop, and commentary sometimes describes proposed changes as though they were already effective. Do not plan around a change until it is actually in force, and confirm the current state of the law with qualified counsel before taking a position.
Frequently Asked Questions
- Does 280E apply to state-licensed medical operators?
- It has generally applied to businesses trafficking in federally controlled substances regardless of state licensure. Because the legal landscape continues to evolve, confirm current treatment with qualified tax counsel each year.
- Is aggressive cost allocation a good strategy?
- No. Consistency and documentation carry far more weight than aggressiveness, and unsupported allocations create exposure rather than savings.
- Do state taxes follow the federal disallowance?
- It varies by state. Florida's corporate income tax computation begins from federal taxable income with state modifications, so federal treatment generally flows through. Confirm the specifics with your adviser.