The 280E Trap: Which Insurance Premiums Can You Actually Deduct

As we dive into the 2026 tax filing season, cannabis operators are once again facing the industry’s most notorious hurdle: Internal Revenue Code Section 280E. 

While we wait for federal rescheduling to potentially alleviate this burden, the reality for the 2025 tax year remains strict. Section 280E prohibits businesses trafficking in Schedule I or II substances from deducting standard business expenses. This includes rent, marketing, payroll for sales staff—and yes, often your insurance premiums. 

However, not all premiums are treated equally. Understanding how to properly categorize your insurance costs could save your business thousands of dollars. 

The “Cost of Goods Sold” (COGS) Exception 

The IRS allows cannabis businesses to deduct the Cost of Goods Sold (COGS). This is the golden rule for navigating 280E. If an expense is directly related to the production of the product, it is generally deductible. If it is related to selling the product, it generally is not. 

This creates a massive divide between Cultivators/Manufacturers and Dispensaries. 

1. Cultivators & Manufacturers: Capitalizing Premiums

If you grow or process cannabis, you are in a stronger position. Expenses tied to your production facility are often considered part of inventory costs. 

• Deductible Opportunity: Premiums for Crop Insurance, Property Insurance on the cultivation facility, and General Liability allocated to production operations can often be capitalized into COGS. 

• The Strategy: Work with your CPA to allocate your insurance bill. If 90% of your square footage is grow space and 10% is administrative office, you may be able to include a significant portion of your property premium in your COGS deduction. 

2. Retail Dispensaries: The Selling Expense Trap

For retailers, the IRS takes a harder line. Since a dispensary’s primary function is selling rather than producing, most operational expenses are considered “General & Administrative” (SG&A) and are disallowed under 280E. 

• The Hard Truth: Premiums for General Liability, Theft/Crime, and Cyber Liability for a dispensary are typically treated as non-deductible selling expenses. You have to pay them to stay in business, but you pay them with post-tax dollars. 

3. The “Ancillary Entity” Strategy

Many savvy operators structure their businesses with separate entities to maximize deductions. 

• Real Estate Holding Companies: If you own your building in a separate, non-plant-touching LLC and lease it to your dispensary, the insurance on that building (Lessor’s Risk) is a standard business deduction for the real estate entity, which is not subject to 280E. 

• Management Companies: Similarly, ancillary management companies that hold the Directors & Officers (D&O) or Employment Practices (EPLI) policies may be able to deduct those costs if structured correctly, provided they are not deemed to be “trafficking” themselves. 

The Bottom Line for 2026

Don’t just hand your insurance binder to your accountant and hope for the best. Be proactive. Ask your broker to break down your premiums by location and operation type. Having a clear distinction between “Production Property Premium” and “Retail Liability Premium” gives your tax professional the ammunition they need to maximize your allowable COGS.

Disclaimer: Cover Cannabis and Inszone Insurance Services are not tax advisors. The application of IRC 280E is complex and subject to interpretation/audit. Always consult with a qualified CPA or tax attorney specializing in cannabis before filing.