Abstract: This paper discusses the impact of 26 U.S.C. §280E on the entrepreneurial strategies of businesses engaged in the sale of cannabis products in the United States. §280E was enacted to discourage activity in the sale of illegal narcotics by limiting the amount of tax deductions available for that activity. As the majority of state governments have legalized the sale of cannabis products at the state level, this creates an interesting dichotomy and conflict of laws. 

The paper describes the scope of the cannabis market in the United States, and outlines the design and application of §280E. It then discusses typical guidance provided to entrepreneurs by accounting and tax professionals in order to minimize the impact of §280E. The paper offers two typical scenarios as examples, and then provides analysis of how a well-designed dual-entity approach to structure an enterprise can result in significant tax savings. The paper addresses some common pitfalls in those arrangements, and closes with some observations about how regulation and entrepreneurial strategy interrelate, the public policy implications of cognitive dissonance at the federal and state levels, and a comparative perspective on regulating this industry in an international context. 

The value of this research is to illustrate how well-designed strategies to minimize the implications of tax provisions can reduce the financial risk to entrepreneurs seeking to do business in highly regulated industries.