As cannabis businesses head into another tax season under Section 280E, a growing number of operators and tax professionals say the rules have already shifted — even if the federal government hasn’t formally admitted it yet.
That was the central message of a recent Outlaw Report webinar moderated by Editor-in-Chief LJ Dawson, featuring Justin Botillier, CEO of Calyx CPA, and Robbie Martin, president of the DC Cannabis Business Association (DCCBA). For operators who missed the discussion, the takeaway was clear: the old assumptions around 280E may no longer be the safest — or smartest — approach. Below is a summary of the information discussed in the webinar.
What 280E Was Designed to Do — and Why It Still Hurts Cannabis
Section 280E of the Internal Revenue Code was enacted in the 1980s to prevent drug traffickers from deducting ordinary business expenses. The law disallows most deductions for businesses “trafficking in substances” that fit the definition of Schedule I or II drugs.
In cannabis, that has translated into devastating tax outcomes — particularly for dispensaries.
“280E is essentially a devastating tax penalty,” Botillier said. “It disallows overhead deductions. You can deduct cost of goods sold, but nothing else.”
For retailers, that often means effective tax rates of 60–90%, even when businesses are barely breaking even.
Cultivators and manufacturers fare slightly better, Botillier noted, because many of their costs can be categorized as production expenses. “Dispensaries are by far the hardest hit,” he said.
The Operator Reality: Phantom Income and Five-Figure Tax Bills
Martin offered a firsthand view of how those rules land on operators — particularly in D.C., where most licensed businesses are filing cannabis-specific tax returns for the first time.
“I owed five figures essentially for nothing,” Martin said of his first retail tax year. Structured as an S-corporation, his business income flowed directly to his personal return. “That phantom income hit my personal taxes, and I didn’t have that just laying around.”
He added that many newer D.C. operators entered the licensed market without fully understanding how 280E would apply — or how business structure could magnify the damage.
“It was extremely prohibitive,” Martin said. “And that’s what pushed me to start digging into alternatives.”
How Inventory Accounting Became the First Escape Hatch
Botillier walked attendees through the evolution of cannabis tax mitigation strategies, particularly the use of inventory accounting rules.
Early strategies relied on Section 471A, which allowed manufacturers to allocate certain overhead costs into inventory. But it was narrow, imperfect, and difficult to defend.
That changed with the Tax Cuts and Jobs Act, which introduced Section 471(c).
“471C simplified everything,” Botillier explained. “If you’re under $29 million in gross revenue, you can use whatever inventory methodology you want — as long as it matches your books and records.”
Under 471(c), businesses can allocate substantially more overhead into inventory and deduct it through cost of goods sold. While the IRS attempted to curb this approach through regulation in 2022, Botillier argued those rules don’t override statutory law.
“Regulation is not tax code,” he said. “Congress writes the tax code, not the IRS.”
The Bigger Claim: Why Botillier Says 280E No Longer Applies at All
The most consequential argument of the webinar came when Botillier explained why he believes cannabis is no longer subject to 280E — even before formal rescheduling.
Section 280E applies not to substances classified as Schedule I or II, but to substances that “fit the meaning” of Schedule I or II, according to Botillier.
In 2023, the Department of Health and Human Services concluded cannabis does not meet that definition — citing accepted medical use and lower abuse potential — and recommended rescheduling to Schedule III.
“According to the tax code itself, 280E doesn’t apply,” Botillier said. “HHS said cannabis does not meet the criteria. The federal government said it does not fit the meaning.”
That interpretation is now being tested in tax court, including the New Mexico Top Organics case. Botillier pointed to Trulieve’s reported $113 million refund as another signal that the issue is already cracking open.
How Businesses Are Filing Right Now
Some firms are already filing returns without reducing deductions for 280E, paired with disclosure forms (8275 or 8275-R) that lay out a “reasonable basis” for the position.
“That’s how you protect yourself from penalties,” Botillier said. “You’re not hiding income. You’re saying: here’s why we believe the law doesn’t apply.”
Importantly, he emphasized that businesses should not retroactively change inventory methods, but instead apply these strategies prospectively with timely filed returns.
Despite fears of aggressive enforcement, Botillier said audits remain rare.
“We’ve had two audits out of hundreds and hundreds of cannabis returns,” he said. “Statistically, that’s almost zero.”
That said, amended returns seeking refunds are facing more resistance. Botillier acknowledged an increase in denials late last year, making forward-looking strategy more attractive than chasing refunds.
Practical Advice for Operators Heading Into Tax Season
Both speakers agreed on several core principles:
- Do not skimp on bookkeeping.
“The people who got destroyed weren’t wrong on the law,” Botillier said. “They lost because their books and records were bad.” - Use cannabis-literate accountants.
Martin warned that many East Coast operators default to traditional CPAs unfamiliar with cannabis-specific rules. - Understand your business structure.
“If you’re an S-corp, don’t be surprised when that income hits your personal return,” Martin said. - Risk is unavoidable — but unmanaged risk is worse.
Filing conservatively doesn’t eliminate danger if it leaves a business insolvent.
