Since early 2024, state-licensed cannabis companies in Michigan and across the country have been changing their approach to filing and paying federal taxes — specifically to claim exemption to a little-known 1982 provision in the Internal Revenue Code called Section 280E — in a move that is saving many of them eight or nine figures apiece.
The sector-wide tax pivot has saved the national cannabis industry billions of dollars over the past year, industry insiders estimated to Crain’s Detroit Business.
The 280E section bars any company from claiming standard business tax deductions if it traffics in Schedule I or Schedule II controlled substances. Marijuana has been a Schedule I narcotic since the federal Controlled Substances Act was signed into law in 1970.Because of 280E, state-legal marijuana companies often wind up paying an effective tax rate of 70%-90% to the Internal Revenue Service each year, which effectively kills the bottom line and often results in net losses for cannabis businesses.
That includes multistate operator Ascend Wellness Holdings Inc., which runs eight dispensaries and a cultivation facility in Michigan, and reported a net loss of almost $85 million in 2024, largely due to 280E. That’s a figure which could change significantly within the next year or two, depending on how this new tax strategy pans out for the industry, insiders said.
“For us, it’s millions. For the industry, it’s billions in terms of cash flow,” said Mario Pinho, CFO of Massachusetts-based MariMed Inc., one of many cannabis companies to claim 280E exemption on its federal returns moving forward.
Those savings are a lifeline for many companies because of how punitive 280E is in practice, said Justin Botillier, founder of Oregon-based Calyx CPA, an accounting firm that serves legal marijuana companies. Botillier emphasized that the effective tax rate under 280E can even be 100% or more if a given company isn’t turning a profit pre-tax.
“If they’re not profitable, like they’re losing money, they can still pay tax on phantom income (under 280E),” Botillier said. “And so they could be losing hundreds of thousands, if not millions of dollars, and still pay tax on hundreds of thousands and millions of dollars. That’s how bad it is.”
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