Section 280E Explained

What the Provision Says

Section 280E denies deductions and credits for amounts paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances within the meaning of federal law. It does not deny the reduction of gross receipts by cost of goods sold, which is why inventory accounting carries so much weight.

Why Cost of Goods Sold Matters

Because cost of goods sold reduces gross receipts rather than functioning as a deduction, costs properly capitalized into inventory remain recoverable. What can be capitalized depends on the applicable inventory rules and on the nature of the business.

• Producers generally capitalize a wider set of costs than resellers
• Allocation of shared costs must be documented and consistent
• Selling and administrative costs are generally disallowed

Common Misunderstandings

State licensure does not exempt a business from the provision, and no structure removes it by itself. Arrangements marketed as workarounds have drawn scrutiny and should be evaluated on their economic substance with professional and legal input.

Practical Steps for Operators

Build a chart of accounts that separates production from everything else, document the costing policy in writing, and reconcile inventory monthly. Those three habits address most of what makes 280E positions fragile.