280E Tax Code: The Key to Cannabis Compliance

The IRS is constantly updating its rules and regulations to keep up with the times. Lately, that has meant updating rules related to the way that cannabis businesses operate and pay their taxes. In particular, IRS Code Section 280E has particular relevance to those who operate within the cannabis industry. This article will examine what this part of the tax code means and how it impacts the cannabis industry today.

What is IRS Tax Code Section 280E?

The Internal Revenue Service (IRS) does not permit businesses that are involved in the trafficking of Schedule I or Schedule II substances to deduct business expenses from their tax payments. Deducting such expenses is a normal practice for virtually any other type of business, but the government wants to discourage businesses from distributing any Schedule I or Schedule II substances.

The IRS recently put out guidance to remind all citizens of the fact that cannabis remains a Schedule I controlled substance under federal law. This guidance comes as a result of rapidly changing state cannabis laws throughout the country. However, despite state laws, the substance is considered illegal under federal law, meaning the rules and regulations under Tax Code Section 280E still apply.

Some of the business expenses that might typically be deducted from one's tax bill include:

Rent: It is generally acceptable for a business to deduct the cost of the rent that the business pays to house its operations. This is a major expense for many companies, and it is something that can significantly reduce the tax bill of those companies.
Utilities: Another expense that many businesses deduct from their tax bill at the end of the year are their utility expenses. It costs a lot of money to keep the utilities on, and the government cuts businesses a break by allowing them to deduct the cost of those utilities from their tax bill.
Marketing Expenses: Certain marketing expenses can also be deducted when a business files its taxes. However, this varies depending on the type of marketing expense that one is looking at, so examine this carefully.

Sadly, NONE of these deductions can be taken out of the tax bill of a cannabis company. That is essential to note for anyone in the industry as it impacts how much they must pay in taxes at the end of the year. If your payroll provider is struggling with 280E compliance, it may be time to make a change, as poor compliance support is one of many reasons to switch cannabis payroll services.

How Do Cannabis Businesses Pay Federal Income Taxes?

Just because cannabis businesses are subjected to additional rules and regulations from the IRS does not mean that they can wiggle out of paying federal income taxes. In reality, they must still contribute to the federal tax system, but they have to go through different forms in order to do so.

A cannabis business will file their taxes using a Form 1120, which is an IRS form used by corporations when they are filing their taxes. They will complete this form just as any other corporation would and determine the amount that they owe in federal taxes. After that, they are welcome to pay their fees via the normal options that any other business can enjoy.

These include:

Check or money order
Via the Electronic Federal Tax Payment System (EFTPS)
Approved third-party payment services

Although the above options are the same ones that other business owners have available to them to pay their federal income taxes, it should be noted that the cannabis industry is a cash-oriented business which can complicate things.

Cannabis Banking Relationships

It's also worth noting that many traditional banks will still not do business with companies involved in the cannabis industry due to legal concerns. Therefore, it can become a hassle for any cannabis-industry business owner who is simply trying to pay his or her taxes via the typical routes.

Can Cannabis Industry Businesses Pay Their Taxes in Cash?

There are special provisions available for any company that chooses to pay its tax bills in cash. This is not the preferred method of payment for the IRS, and as a result they require special appointments to be set up to make this happen.

Should a business decide to pay its federal tax bill in cash, the IRS will need to be notified in advance. The agency must have this advance notice so that it is capable of gathering together the necessary resources to offer the business an extra layer of security around the payment that they are making. After all, many tax bills are quite large, and paying for them entirely in cash means that a lot of money will be moving through an IRS office.

Will Cannabis Get Rescheduled Under Federal Law?

As of 2025, cannabis has not been rescheduled under federal law.

There has certainly been a push to do so both from the public and industry leaders. However, it is uncertain as to the timing of when this may happen. More and more states are on board with the legalization of the substance within their borders, but a full rescheduling of cannabis under federal law remains uncertain at this time.

If you're looking to expand your cannabis business into a new state, make sure you're aware of marijuana legalization by state.

Common Questions Regarding Cannabis Business Taxes

Some common questions regarding cannabis business taxes include:

My state legalized cannabis, but the federal government hasn't. Do I still have to file my taxes the same as any other business?

Yes, you are still legally required to file your federal and state taxes just as any other business must. In fact, you are at somewhat of a disadvantage simply because of the IRS Code Section 280E that we mentioned before. This does not permit you to take some of the same types of deductions that other companies are permitted to take when they file their taxes. So, while you still must file your taxes according to the same deadlines and rules as other businesses, you must also absorb the burden of not getting some of the same deductions that other businesses are allowed to enjoy.

Can I apply for a payment plan if I can't afford to pay all that I owe?

There are payment plans available through the IRS for those who are unable to pay the full sum of their tax burden when the bill comes due. Ideally, you will have the funds available that you require to pay your full bill, but that is not possible in every circumstance.

As such, you might seek some of the flexible payment plans, such as:

Short-Term Payment Plan (up to 180 days): Those who anticipate that they can afford to pay off their IRS debt within 180 days can apply for a short-term payment plan. There is no fee to set this up, and you can pay online or by mail. This plan option is only for those who can fulfill their debt obligation within a 180 day period.
Long-Term Payment Plan (more than 180 days): These plans are for those who have larger tax burdens that they cannot easily put to rest within 180 days. Those in this circumstance must make monthly payments towards their debt and must submit a Form 433-B to provide their company's financial information to the IRS. This is used to help determine a reasonable amount that one can afford to pay monthly throughout the life of the debt.

Can you face penalties for being in the cannabis industry if you are audited?

A big fear for many in the cannabis industry is that they will face massive penalties in the event that they are audited by the IRS. They believe that they might be singled out for participating in an industry that is still illegal at the federal level. There are certainly some major penalties that one can face if they are not diligent about keeping their tax records in order and paying what they owe.

Among the IRS penalties that one could face are:

Will I face penalties under Section 6662 of the IRS Tax Code?

There is never a 100% guarantee that any given business will face any specific penalties under the IRS tax code.

However, cannabis industry businesses do run a greater risk of these types of penalties for a variety of reasons, including:

Improperly Claimed Business Deductions
Misclassification of Expenses
Cash-Heavy Businesses

Can I claim tax deductions if I operate a business that sells marijuana?

The short and simple answer to this question is no. The federal government still considers marijuana to be a Schedule I drug and thus illegal. As such, any business that operates in the space is not permitted to take the same kind of deductions that they could if they were involved in any other industry.

How do I handle cash payments of over $10,000 from a tax perspective?

The cannabis industry is such a cash-heavy business that it is sometimes the case that a given company might handle a cash payment that exceeds $10,000. If that is the case for you, then you need to know that you must file an IRS Form 8300 to report such payments. The purpose of this form is to allow the IRS to better understand why you received such a large cash payment and also for the IRS to better track and trace any illegal transactions that might be out there (because illegal transactions are often made in cash).

I only sell products that are legally permitted under the 2018 Farm Bill. Am I subject to IRS § 280E?

Good news! You are not subject the the rules under section 280 of the IRS tax code if your business is fully compliant with the 2018 Farm Bill. Just be certain that you have followed that law to the letter and you can avoid the provisions of this aspect of the tax code.

Get Help with Cannabis Compliance and Taxes

There are a lot of additional hurdles that companies involved in the cannabis trade must adhere to when filing their taxes. Make certain you keep up with all of this and fully understand what you need to do to file your taxes properly. It is much better to be on the right side of all applicable tax laws than to face the consequences of not doing so.

Though if your business is struggling with cannabis business taxes, banking relationships, or other cannabis compliance issues, a cannabis payroll company may be able to help.