Under Internal Revenue Code 280E (IRC 280E), cannabis businesses cannot deduct most business expenses, other than cost of goods sold, from their federal taxes or receive tax credits as traditional businesses do because the plant is listed as a Schedule 1 drug under the federal Controlled Substances Act. Many states simply reflect federal tax policy in their own tax codes, thus cannabis businesses are also blocked from state-level tax deductions. As a result, many cannabis businesses are estimated to pay effective tax rates of up to 50%.

Colorado became the first state to approve 280E deductions in 2014. In 2016-2021, Arkansas (2019), California (2019), Hawaii (2016), Louisiana (2019), Minnesota (2019), Michigan (2019), Maine (2018), Montana (2017), New Mexico (2021), and Oregon (2016) have approved laws that exempt, or “decouple”, businesses from Section 280E of the federal tax code. In 2022, Illinois, Massachusetts, Missouri and Vermont permitted 280E deductions for their cannabis industry. In spring 2023, legislators in Connecticut, Delaware, Illinois, New Jersey, New York, Virginia and Washington DC passed legislation that will allow cannabis companies to deduct business expenses from their state income taxes.

Some states allow deductions for both corporate business tax and gross income tax while other states do not allow deductions for both.

As of July 2023, 21 U.S. states have decoupled IRC 280E from their state tax codes. The state-level exemption does not affect the federal taxes owed by cannabis companies, however, and businesses will still not be allowed to deduct expenses toward those federal income taxes.

Retail Cannabis Business 280E Deductions Sample, Year 7 (New Jersey)

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