How Cannabis Tax Deductions Can Reduce Your Tax Bill
Running a cannabis business comes with high costs—but your tax bill doesn’t have to be one of them. Many cannabis companies overpay in taxes because they aren’t maximizing their cannabis tax deductions or structuring their finances correctly.
The IRS applies Section 280E, which prevents cannabis businesses from deducting normal operating expenses like rent, payroll, and marketing. As a result, some businesses face effective tax rates of 50-70%—significantly higher than other industries.
However, with the right tax strategy, you can legally reduce your tax burden by optimizing deductions and structuring your business efficiently. This guide will walk you through the key cannabis tax deductions available and expert tips to help your business save money in 2025.
Understanding 280E and Cannabis Tax Deductions
IRS Section 280E prohibits cannabis businesses from deducting typical operating expenses since cannabis remains federally illegal. However, it does allow deductions for Cost of Goods Sold (COGS)—which means understanding what qualifies as a cannabis tax deduction is crucial.
While you can’t deduct rent for a dispensary or salaries for administrative employees, you can deduct certain production costs directly tied to your inventory. The key to lowering your tax bill is properly categorizing expenses under COGS to ensure maximum deductions.
Maximizing Cannabis Tax Deductions Through Cost of Goods Sold (COGS)
COGS is one of the only major cannabis tax deductions available under 280E. This includes direct costs associated with producing your cannabis products.
What Can Be Included in COGS?
- Raw materials and inventory costs
- Wages for cultivation and production staff
- Rent and utilities for manufacturing spaces
- Equipment used in production
- Packaging and labeling directly tied to inventory
What Cannot Be Included in COGS?
- Retail-related payroll
- Marketing, advertising, and branding expenses
- Office supplies and general business costs
To ensure compliance, work with a cannabis CPA firm that specializes in 280E tax strategy to properly allocate expenses and avoid IRS red flags.
Choosing the Right Business Structure
Your business entity type significantly impacts your ability to claim cannabis tax deductions and lower your tax bill. The wrong structure can lead to double taxation or higher tax rates.
Best Business Structures for Cannabis Tax Savings:
✅ C-Corporation (C-Corp): Provides flexibility for reinvestment and tax planning.
✅ Multi-Entity Structures: Separating retail operations from management or property ownership can reduce 280E tax exposure.
Consulting a cannabis tax expert before restructuring your business can prevent costly mistakes and maximize tax savings.
Leveraging State & Local Cannabis Tax Deductions
Some states offer tax relief to offset the federal limitations of 280E. If you operate in a state with cannabis-friendly tax policies, you may be eligible for additional deductions.
State Tax Deduction Opportunities:
- California SB 133 – Allows state-level deductions for cannabis businesses.
- New York – Provides deductions for legal cannabis operators.
- Michigan – Offers excise tax deductions for licensed marijuana businesses.
Cannabis tax laws vary by state. A cannabis CPA can help ensure you’re taking full advantage of state tax deductions.
Accounting Strategies to Maximize Deductions
Accurate inventory accounting is essential for properly claiming cannabis tax deductions and reducing IRS scrutiny.
Key Accounting Strategies for Cannabis Businesses:
- Use Accrual Accounting: The IRS requires cannabis businesses to use accrual accounting instead of cash-based methods.
- Implement Section 471 Rules: This allows larger deductible COGS expenses when applied correctly.
- Use Cannabis-Specific Accounting Software: Systems like MJ Freeway and Metrc help maintain audit-ready financial records.
A well-documented accounting system helps avoid costly IRS audits and ensures all eligible tax deductions are claimed.
Take Action to Reduce Your Cannabis Tax Bill in 2025
Lowering your cannabis tax bill requires proactive tax planning—waiting until tax season is too late. By maximizing COGS deductions, leveraging state tax credits, choosing the right business structure, and implementing accurate accounting strategies, you can significantly reduce your tax burden.
🔗 Need expert tax guidance? Book a consultation with GreenGrowth CPAs today to ensure you claim every possible cannabis tax deduction.
