Cannabis Business Tax Calculator β Section 280E + State Excise
Calculate cannabis business taxes under Section 280E: only COGS is deductible, no business expense deductions. Includes state excise tax by state and 280E impact analysis.
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$
Only this is deductible under 280E $
Rent, payroll, marketing, etc. β disallowed deductions Examples:
$0
Federal Tax (280E)
$0
State Excise Tax
$0
Net Profit After All Tax
0%
Effective Federal Tax Rate
280E Tax Calculation Breakdown
Section 280E: The Cannabis Tax Problem
Section 280E was intended to prevent drug traffickers from deducting business expenses. For legal cannabis operators, it creates an extreme tax burden: federal income tax is owed on gross profit (revenue minus COGS only), not net profit. A business earning $300,000 in operating profit but paying $300,000 in non-deductible operating expenses still owes federal tax on the full gross profit.
280E Formula
Federal Taxable Income = Gross Revenue β COGS only
(Rent, payroll, marketing, etc. are NOT deductible)
Federal Tax = Taxable Income Γ 21% (C-Corp) or marginal rate (pass-through)
State Excise Tax = Gross Revenue Γ State Excise Rate
Actual Economic Profit = Revenue β COGS β OpEx β All Taxes
(Rent, payroll, marketing, etc. are NOT deductible)
Federal Tax = Taxable Income Γ 21% (C-Corp) or marginal rate (pass-through)
State Excise Tax = Gross Revenue Γ State Excise Rate
Actual Economic Profit = Revenue β COGS β OpEx β All Taxes
Example β $1M Revenue Dispensary (California, C-Corp)
Gross revenue: $1,000,000 | COGS: $400,000 | Operating expenses: $300,000
Economic profit before tax: $1M β $400K β $300K = $300,000
280E taxable income: $1M β $400K = $600,000 (OpEx not deductible)
Federal tax (21% C-Corp): $600,000 Γ 21% = $126,000
CA excise tax (15%): $150,000
Net profit after all taxes: $300,000 β $126,000 β $150,000 = $24,000 (2.4% margin)
Economic profit before tax: $1M β $400K β $300K = $300,000
280E taxable income: $1M β $400K = $600,000 (OpEx not deductible)
Federal tax (21% C-Corp): $600,000 Γ 21% = $126,000
CA excise tax (15%): $150,000
Net profit after all taxes: $300,000 β $126,000 β $150,000 = $24,000 (2.4% margin)
Extended
280E Impact Analysis + State-by-State Excise Comparison
See how much you'd save if Section 280E was repealed and compare excise taxes across cannabis states
Model the tax savings if Section 280E was repealed (cannabis rescheduled to Schedule III) and compare state excise taxes side-by-side.
280E vs Normal Business Tax Comparison
| Item | With 280E (Current) | Without 280E (Rescheduled) |
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State Excise Tax Comparison (per $1M revenue)
| State | Excise Rate | Excise on $1M | Structure |
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Frequently Asked Questions
What is Section 280E and how does it affect cannabis businesses?
Section 280E of the Internal Revenue Code was enacted in 1982 in response to a drug trafficker who attempted to deduct business expenses. It prohibits deductions for any business "trafficking in controlled substances" under federal law. Since cannabis remains a Schedule I federal controlled substance, cannabis businesses cannot deduct rent, salaries, marketing, utilities, insurance, or any other ordinary business expenses. The ONLY deduction allowed is Cost of Goods Sold (COGS) under Section 471. This means a cannabis business with 40% gross margins may pay federal income tax on 40% of revenue β effectively an 80%+ effective tax rate in some cases.
What can cannabis businesses include in Cost of Goods Sold (COGS)?
COGS for cannabis includes: raw cannabis plant material, seeds, clones, growing supplies (soil, nutrients, lighting), direct labor for cultivation/extraction/production, packaging materials for products, lab testing costs, direct facility costs allocated to production (not retail), and depreciation on production equipment. Administrative labor, retail store costs, delivery, marketing, and management salaries are NOT deductible under 280E. Retailers can only deduct the purchase price of inventory, while vertically integrated operations have more COGS latitude.
What are the current state cannabis excise tax rates?
State excise taxes vary significantly: California 15% retail excise (cultivation tax was eliminated in 2022); Colorado 15% retail marijuana excise; Illinois tiered by THC content β 10% on flower under 35% THC, 20% on products above 35% THC, 25% on infused products; Washington 37% retail excise (one of the highest); Michigan 10% retail excise + 6% sales tax + new 24% wholesale markup effective 2024; Oregon 17% retail; Nevada 15% retail + 10% wholesale. Most states also impose sales tax on top of excise tax.
Does the SAFER Banking Act affect Section 280E?
No. The SAFER Banking Act (Secure and Fair Enforcement Regulation Banking Act) would address banking access for cannabis businesses β allowing them to use banking services, accept credit cards, etc. It does NOT change Section 280E taxation. Only rescheduling cannabis to Schedule III (or descheduling it entirely) would remove the 280E restriction. The DEA proposed rescheduling cannabis to Schedule III in 2024, which if finalized, would eliminate 280E for cannabis businesses β potentially saving the industry billions in taxes.
If cannabis is rescheduled to Schedule III, what changes?
Rescheduling to Schedule III would remove cannabis from the "controlled substances" definition that triggers Section 280E. Cannabis businesses could then deduct all ordinary and necessary business expenses like any other business: rent, payroll, marketing, insurance, and interest. This would dramatically reduce effective tax rates. A business currently paying 70% effective federal tax could drop to 21% (corporate rate) or ~30% (pass-through). The cannabis industry estimates 280E costs the industry approximately $1.8β$2.5 billion per year in excess federal taxes.