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Under IRS Code Section 280E, businesses involved in the sale of marijuana, which is still classified as a Schedule I controlled substance under federal law, face significant restrictions on tax deductions. However, there is one key exception:
Cost of Goods Sold (COGS): Marijuana businesses can deduct expenses directly related to the production or acquisition of inventory. This includes costs like seeds, soil, utilities for growing facilities, and labor directly tied to production.
Other typical business expenses, such as advertising, rent, salaries, and travel, are not deductible under Section 280E. This creates a higher taxable income for marijuana businesses compared to other industries.
Direct Costs of Production
Cost of Goods Sold (COGS): Expenses directly related to the production of marijuana, such as labor, materials, and utilities for the production company, can be included in COGS and are deductible. This applies to the company with the license to produce.
Grow Operations vs. Dispensaries
Deductible expenses for marijuana cultivators is generally higher than for dispensaries due to the nature of their operations. Since Cost of Goods Sold (COGS) is deductible under IRS Code Section 280E, most expenses directly related to the production of marijuana are eligible. These include costs for seeds, soil, utilities, labor, and equipment used in cultivation.
For cultivators, deductible expenses often represent a significant portion of their total costs—sometimes 50-70% or more, depending on how much of their operations are tied to production versus non-deductible activities like marketing or administration. Proper accounting and documentation are crucial to maximize deductions while staying compliant with tax laws.
For marijuana dispensaries, the percentage of deductible expenses is generally much lower compared to other businesses due to the restrictions of IRS Code Section 280E. Only Cost of Goods Sold (COGS) is deductible, which includes expenses directly related to the acquisition and handling of inventory, such as:
- The purchase price of cannabis products.
- Transportation and shipping costs.
- Utilities for inventory storage areas.
- Non-deductible expenses include rent, advertising, employee salaries (not tied to inventory), and general administrative costs. As a result, the deductible portion of a dispensary’s expenses often ranges from 20% to 40%, depending on how much of their total costs are tied to COGS.