What Section 280E actually disallows
Section 280E denies deductions and credits for amounts paid or incurred in carrying on a trade or business that consists of trafficking in a controlled substance under federal law. Because cannabis remains a Schedule I substance federally, every MED-licensed business in Colorado — from a single Retail Marijuana Store to a vertically integrated multi-license operator — is subject to it, regardless of full compliance with the Retail Marijuana Code.
What survives is cost of goods sold. Federal tax law still allows a trafficking business to reduce gross receipts by its cost of goods sold before 280E ever applies, which is why properly built cost accounting is the single highest-leverage tax planning tool available to a Colorado cannabis business.
Maximizing a defensible cost of goods sold
We apply the inventory capitalization rules under Treasury Regulation 1.471-11 to pull as many legitimate production and acquisition costs as possible into COGS — direct labor, materials, certain facility costs tied to production space, and transportation of inventory — while keeping the position conservative enough to survive an IRS examination rather than inviting one.
The Colorado state-level 280E subtraction
Colorado allows licensed marijuana businesses to subtract, on their Colorado return, expenditures that were disallowed federally under Section 280E. In practice, this means the marketing costs, retail wages, professional fees and other operating expenses that can't reduce your federal taxable income can still reduce your Colorado taxable income, which is taxed at Colorado's flat income tax rate.
Claiming this subtraction correctly requires a clean reconciliation between your federal return's disallowed-expense schedule and the subtraction reported on your Colorado filing. We build that reconciliation as a standard part of every Colorado cannabis tax engagement so the subtraction is fully substantiated if the Department of Revenue asks questions.
Entity and operational planning around 280E
Some operators can reduce 280E exposure through careful entity separation between plant-touching and non-plant-touching activities — a management company, an equipment leasing entity, or a separate real estate holding entity, each with its own arm's-length pricing. We evaluate whether that structure makes sense for your specific license mix rather than applying it as a one-size-fits-all template, since poorly documented separation can create more IRS risk than it resolves.
Layering the Colorado subtraction into federal 280E planning
Federal 280E planning and the Colorado state-level subtraction have to be modeled together, not separately. We calculate your fully disallowed federal deductions first, then apply that same population of expenses as a subtraction on your Colorado return, so you're not leaving state tax relief on the table while you're managing your federal exposure.
