What is IRS Section 280E and how does it affect cannabis businesses?

Section 280E of the Internal Revenue Code prohibits businesses that traffic in Schedule I or Schedule II controlled substances, as defined by the Controlled Substances Act, from deducting ordinary and necessary business expenses. Because cannabis is still a Schedule I substance under federal law, state-legal cannabis businesses cannot deduct most operating expenses and may only reduce taxable income through Cost of Goods Sold (COGS). Accurate payroll and labor cost allocation to COGS is essential to lower the tax burden.

How does payroll help with 280E and Cost of Goods Sold?

Wages paid to employees directly involved in production, cultivation, processing and inventory can often be allocated to Cost of Goods Sold, which remains deductible under Section 280E. Clarity HCM tracks and codes labor by role and department so the portion of payroll tied to producing your product is captured accurately for 280E reporting.

Do you support dispensaries, cultivators and multi-state operators?

Yes. We serve dispensaries, cultivators, processors, manufacturers, delivery operators and multi-state operators (MSOs), with multi-state payroll tax filing, compliance tracking and cash-friendly employee pay options.

Cannabis Payroll & 280E Compliance Services | Dispensary & Cultivation Payroll

Cannabis workforce management

Everything a cannabis operator needs to run payroll and HR.

One connected platform for cannabis payroll, tax filing, compliance and people management, tailored to how cannabis businesses actually operate.

Cannabis payroll processing

Accurate, on-time payroll with direct deposit, checks, pay cards and earned wage access, plus automated federal, state and local payroll tax filing for cash-heavy cannabis operations.

280E cost of goods sold allocation

We code and allocate labor by role and department so wages tied to production and cultivation are captured as Cost of Goods Sold for IRS Section 280E reporting.

Compliance & reporting

Stay ahead of I-9, EEO-1, OSHA, badge and license tracking, and state cannabis regulations with built-in compliance tools and expert guidance.

HR & onboarding

Paperless onboarding, electronic signatures, handbooks and policy management for a high-turnover, fast-scaling cannabis workforce.

Time & attendance

Track hours across retail floors, grow rooms and multiple locations, with scheduling that feeds straight into payroll and 280E labor allocation.

Benefits administration

Attract and keep talent with benefits enrollment and administration built for cannabis employers, from single dispensaries to multi-state operators.

The 280E challenge

What is IRS Section 280E, and why does it matter?

Section 280E of the Internal Revenue Code prevents businesses that traffic in Schedule I or Schedule II controlled substances, as defined by the federal Controlled Substances Act, from deducting ordinary and necessary business expenses. Because cannabis is still classified as a Schedule I substance under federal law, state-legal cannabis businesses face a much heavier effective tax rate than other companies.

Most operating expenses, like marketing, rent for retail space and general administration, are not deductible under 280E.
Cost of Goods Sold (COGS) remains deductible, so accurate cost allocation is the single biggest lever cannabis businesses have.
Wages for employees directly involved in producing, cultivating and processing product can often be allocated to COGS.
Clean, well documented payroll records make 280E filing and any audit far easier to defend.

How Clarity helps you capture every deductible dollar

We build your payroll so labor is tracked by role, department and location from day one. That means the portion of wages tied to cost of goods sold is captured accurately, your reporting is audit-ready, and your team spends less time untangling spreadsheets at tax time.

Our specialists guide you through the tax process so your company can keep more of what it earns and stay focused on growth.

Section 280E · Internal Revenue Code · Controlled Substances Act

This page is for general information only and is not tax or legal advice. Cannabis tax rules under Section 280E are complex and change over time. Please consult a qualified tax professional about your specific situation.

Cannabis payroll, done right

Let’s get your cannabis payroll and 280E under control.

Talk to a specialist who understands dispensary, cultivation and multi-state cannabis payroll, and get a plan tailored to your business.

Request a demo (888) 336-6320

2203 N Lois Avenue, Tampa, FL 33607 · sales@clarity-hcm.com