If you operate—or plan to open—a cannabis dispensary in New York, one of the biggest financial challenges you’ll face isn’t just state regulations or startup costs. It’s Section 280E of the Internal Revenue Code.
Despite New York’s legalization of adult-use cannabis, the federal government still classifies cannabis as a Schedule I controlled substance. That means your dispensary is prohibited from deducting normal business expenses on your federal tax return, making your effective tax rate much higher than a traditional business.
But with the right strategy, you can legally reduce your tax exposure and keep more of your hard-earned revenue.
1. What Is Section 280E?
Section 280E disallows tax deductions or credits for businesses trafficking in controlled substances. For cannabis dispensaries, this means you can’t deduct:
- Rent and utilities
- Marketing and advertising
- Salaries for non-COGS employees
- Office expenses or software
- Professional services (even accounting and legal fees)
The only exception? Cost of Goods Sold (COGS)—the direct cost of acquiring or producing cannabis products.
2. Why 280E Hits Dispensaries Hard
Dispensaries are especially vulnerable because their operating expenses are high—staffing, security, and storefront costs eat into margins. Without deductions, you may face effective tax rates of 60–80% if you’re not proactive.
That’s why tax strategy isn’t optional in cannabis—it’s a survival tactic.
3. How to Maximize Your COGS Under 280E
While you can’t deduct typical overhead, you can deduct COGS. For dispensaries, this typically includes:
- Product purchase cost
- Shipping and freight (if tied directly to product acquisition)
- Storage expenses for inventory areas
- Salaries for inventory staff (if directly involved in product handling)
To maximize this deduction:
- Use detailed cost allocation methods
- Maintain accurate product-level inventory data
- Track labor time by role and responsibility
- Keep robust documentation for audits
4. Avoid Common 280E Mistakes in New York
Many new operators make critical mistakes that raise red flags for the IRS and NY Department of Taxation:
- Combining cannabis and non-cannabis income in one legal entity
- Failing to differentiate between sales, admin, and inventory roles
- Using generic accounting software not designed for 280E
- Not reconciling seed-to-sale data with financial records
All of these can lead to underpayment, overpayment, or audit-triggering discrepancies.
5. Consider a Two-Entity Structure—Cautiously
Some operators explore separating operations into two entities:
- One handling non-plant-touching functions (e.g., branding, IP)
- One handling plant-touching retail
While this may offer limited tax benefits, it must be structured and documented carefully to withstand IRS scrutiny. Any intercompany transactions must be arm’s length and legally supportable.
Consult a cannabis-specialized CPA before implementing this structure.
6. Stay Prepared for Tax Audits
New York’s OCM and the IRS are increasing enforcement, and dispensaries are prime targets. Be audit-ready with:
- Clean general ledger and chart of accounts
- Monthly reconciliations of COGS
- Clear documentation of labor allocation and time tracking
- Secure backup of all financial records and seed-to-sale data
An audit may cover multiple years—so maintain compliance and documentation continuously, not just at tax time.
💸 Final Thoughts: 280E Doesn’t Have to Break You
Yes, 280E is challenging—but with the right planning, you can preserve your margins, avoid penalties, and build a sustainable dispensary in New York’s competitive market.
GreenGrowth CPAs is one of the leading cannabis accounting firms helping dispensaries navigate 280E with confidence. From tax preparation to entity structuring and audit defense, we help cannabis businesses legally reduce tax burdens while staying fully compliant.
👉 Book a consultation with GreenGrowth CPAs to build your 280E strategy before tax season sneaks up.
