If you run a cannabis business, you’ve likely already heard about Section 280E of the IRS tax code. But what you may not know is how much this provision can quietly erode your profitability, or how strategic accounting practices can mitigate the impact. At Agility Financial Partners, we’ve helped businesses navigate complex, high-stakes financial regulations for over a decade. Now, as we expand into 280E and cannabis accounting, we’re bringing that same operational discipline and strategic mindset to an industry that needs it most.   A man with glasses seated on a couch working with pen and paper.              

What Is 280E and Why It Matters for Your Cannabis Business

Section 280E prohibits businesses that “traffic” in federally controlled substances—including legal cannabis—from deducting most ordinary business expenses from their federal taxes. That means costs like rent, marketing, payroll, and even security may not be deductible. What can be deducted? Only cost of goods sold (COGS). And that’s where US Code 471 Rule for Inventories accounting comes into play. Without strategic structuring and accurate classification of expenses, many cannabis companies end up overpaying federal taxes by 30% or more.

Common 280E Mistakes (That You Can Avoid) with Proper Cannabis Accounting

Cannabis founders have a lot on their bowl, but bookkeeping shouldn’t be one of those things. Unfortunately, many businesses in the industry have to handle the accounting on their own or outsource to inexperienced folks. Here are some mistakes we see time and again:

Overlooking Indirect Cost Allocation That Could Legally Be Included in COGS

Under 280E, you’re only allowed to deduct the cost of goods sold (COGS). But many operators don’t realize that certain indirect costs, like a portion of rent, utilities, or salaries, can be allocated to COGS with the right documentation under Rule 471, a US GAAP measure for allocating costs to inventory. Without the right cannabis accountants, you end up overpaying federal taxes, miss legitimate deductions, and cut into your margins, leaving less capital for growth. Make sure to use a 280E-specific chart of accounts and track expenses by activity or location to justify reclassification into COGS.

Blending Cannabis and Non-Cannabis Operations Without Proper Entity Separation

Many cannabis businesses operate both plant-touching and non-plant-touching services (e.g., branding, consulting, IP). If they’re housed under the same legal entity without clear separation, you may lose the ability to deduct eligible expenses. The IRS could treat the entire entity as subject to 280E, disallowing all deductions, even those technically unrelated to cannabis sales. Instead, cannabis organizations need to establish separate, standalone legal entities with independent financials, banking, and payroll to preserve deductibility.

Hiring Non-Specialized Accountants Who Treat You Like a Traditional Business

280E accounting is not traditional accounting. If your CPA or bookkeeper doesn’t understand cannabis-specific tax restrictions and entity structuring, you’re not just at risk of losing some money; you’re at risk of losing your entire business. 

Smart Workarounds and Strategic Moves for 280E and Cannabis Accounting

While there’s no “loophole” to escape 280E, here are some legitimate strategies cannabis businesses use to reduce their tax burden:

Entity Structuring

Create a separate legal entity for non-plant-touching services (e.g., management, branding, intellectual property), which can deduct normal business expenses.

Chart of Accounts Optimization

Use a 280E-specific chart of accounts that allows you to properly allocate direct and indirect costs to COGS via Rule 471, and support it with clear documentation.

Real-Time Cost Tracking

Don’t wait until year-end to figure out what qualifies for COGS. Implement systems that track and tag transactions accurately from day one.  Proper cost accounting for inventory is complex and requires in-depth analysis and data tracking.

Cannabis-Specific Accountant or CFO Partner

Generalist CPAs often miss key details. A fractional CFO with cannabis expertise can offer investor-ready reports and reduce audit risk.

Why 280E Strategy Matters for Growth

Let’s say you’re fundraising, preparing for acquisition, or expanding to new states. If your financials aren’t bulletproof, and your tax strategy isn't aligned, you’ll scare off investors, face tax penalties, or struggle to scale. You don’t just need clean books. You need a reporting and compliance structure that can handle scrutiny and support growth.

Why Agility Financial Partners for Cannabis Accounting?

Agility brings the operational experience of a traditional finance partner, with the adaptability to support cannabis businesses navigating evolving regulations. We’ve helped dozens of companies build financial systems that scale, and now, we’re doing the same for cannabis. If you want your cannabis business to stay in the green, Agility Financial Partners can help. We offer cannabis-specific financial strategy, cost accounting implementation, and fractional CFO support tailored to your stage of growth. Whether you're scaling operations, raising capital, or just trying to stay compliant, we bring structure to the chaos so your financials work as hard as you do. Does your cannabis organization need financial help? Contact us today.