Short answer: Mostly no. If you're a plant-touching cannabis business, Section 280E of the Internal Revenue Code disallows the deduction for most of your insurance premiums the same way it disallows rent, payroll, and marketing. But "mostly no" isn't the whole answer. Premiums tied directly to production can often be capitalized into Cost of Goods Sold (COGS), which 280E doesn't touch, and property coverage on your building can be fully deductible if that building sits in a genuinely separate, non-plant-touching entity. Both paths are real. Both are also easy to get wrong, and the IRS knows exactly where operators try to cut corners.

We work with cannabis operators across our licensed states every day, and almost no broker will bring this topic up - it feels like tax advice, not insurance advice. But how your coverage is structured changes what's deductible, so it's worth understanding before your CPA has to work around a policy that wasn't built with 280E in mind.

What Is Section 280E, and Why Does It Reach Your Insurance Bill?

Section 280E is one sentence, and it's been reshaping cannabis accounting since 1982:

"No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business...consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted." (26 U.S.C. § 280E)

Marijuana is still a Schedule I substance for the vast majority of operators (more on the 2026 rescheduling news below), so that sentence reaches every "amount paid or incurred in carrying on" a plant-touching business - which includes your general liability, product liability, crime, cyber, and D&O premiums. Under 280E, those are treated the same as any other disallowed operating expense.

Does the 2026 Rescheduling News Change This?

Not yet, for most operators - and it's important not to get ahead of where things actually stand. On April 23, 2026, the Acting Attorney General signed an order moving two narrow categories - FDA-approved drug products containing marijuana and medicinal marijuana products under a qualifying state license - from Schedule I to Schedule III (DOJ, April 2026). The DEA began an administrative hearing on broader rescheduling on June 29, 2026, and by late August 2026 the DEA's own post-hearing brief argued that marijuana no longer meets the criteria for Schedule I status. That broader decision - the one that would actually move adult-use and bulk cultivation out from under 280E - is still pending.

In plain terms: unless your operation is exclusively an FDA-approved product line or falls under a qualifying state medical license covered by the April order, you're still squarely inside 280E today. Even operators who think they qualify for the narrow April carve-out should get their CPA's read before changing anything on a return - the IRS hasn't issued implementing guidance on how the reclassification flows through to existing tax positions.

Which Premiums Are Flatly Non-Deductible?

For a retail dispensary or any plant-touching entity, these are treated as ordinary selling or operating expenses and are not deductible under 280E:

  • General liability and product liability on the dispensary or retail operation
  • Theft/crime coverage
  • Cyber liability
  • D&O and EPLI
  • Any premium tied to sales, marketing, or administrative functions

This is the default position, and it's where most cannabis businesses' insurance sits.

Which Premiums Can Flow Through COGS Instead?

280E doesn't touch Cost of Goods Sold, because COGS reduces gross receipts before you ever get to "gross income" - it's not a deduction "in carrying on" the business, it's a component of what your revenue actually was. Courts have repeatedly confirmed this, most notably in the Ninth Circuit's 2021 Harborside decision (Patients Mutual Assistance Collective Corp. v. Commissioner) and the Tax Court's 2018 ruling in Alterman v. Commissioner. But how much insurance you can push into COGS depends heavily on what kind of operation you run:

Dispensaries and other resellers are held to Treasury Regulation 1.471-3(b), which is narrow - essentially the invoice price of the product plus the cost of getting it to your store. Property or liability insurance on a retail location generally doesn't fit into that formula. This is exactly what Harborside argued for and lost on appeal.

Cultivators, processors, and manufacturers have real room here. Because you're producing inventory rather than just reselling it, you're entitled to use the full absorption costing method under Treasury Regulation 1.471-11 - and the Tax Court held in Alterman that 280E taxpayers use this pre-1986 version of §471, not the newer §263A rules. Section 1.471-11(c)(2)(iii)(g) specifically lists "insurance costs incident to and necessary for production or manufacturing operations...such as insurance on production machinery and equipment" as an includible indirect production cost. In practice, that means: crop insurance, property insurance on the cultivation and processing facility, and the production-allocated share of your general liability and workers' comp can often be capitalized into COGS - provided you treat that insurance the same way in your financial books (this is a books-and-records requirement, not optional) and can defend the allocation.

That allocation is the part that gets operators in trouble. Alterman didn't lose on the legal principle - the taxpayers lost specific costs because they couldn't produce the records to support them. If 70% of your square footage is grow and processing space, you need a real basis (square footage, headcount, machine-hours) for saying 70% of the facility's property and liability premium belongs in COGS - not a round number picked at tax time.

What About the Building Itself?

This is the piece Tyler flagged as the most useful part of this whole question, and it deserves the biggest disclaimer to go with it. If your real estate is owned by a genuinely separate, non-plant-touching LLC that leases the building to your operating company, that LLC's own expenses - including its own lessor's-risk property insurance - are ordinary Section 162 deductions. 280E's text only reaches "such trade or business" that traffics in a controlled substance; a landlord entity that does nothing but hold real estate and collect rent isn't that business.

But courts evaluate this under a multiple-trade-or-business test, and the leading case - CHAMP v. Commissioner - looks at the degree of economic interrelationship between the two entities, not just whether they're on separate paperwork. The IRS will collapse this structure back into one 280E-covered business if it looks cosmetic. In practice, the arrangement needs:

  • A real, arm's-length written lease at market rent - not a number backed into after the fact
  • Genuine operational separation - the realty entity shouldn't share staff, management, or resources with the operating company without a proper allocation and separate payment for them
  • Real economic substance on the real estate side - ideally different ownership between the landlord and the operator is the strongest fact pattern, since common ownership invites the IRS to argue the entities are economically the same business
  • Consistent treatment on both sides' books and returns

None of this is a substitute for your CPA and tax counsel signing off on the structure before you rely on it. A landlord LLC that exists solely to move insurance premiums off the operating company's return, with the same owners and no independent business purpose, is exactly the fact pattern the IRS has successfully challenged before.

What Should You Actually Do With This?

  1. Bring in a cannabis-specific CPA before you file, not after an audit notice. General-practice accountants routinely miss the 471-11 vs. 471-3(b) distinction, and it's worth real money.
  2. Build and keep a documented cost-allocation methodology for splitting insurance premiums between COGS-eligible production costs and non-deductible selling/G&A costs. Square footage, headcount, or machine-hours - pick a defensible basis and keep the workpapers.
  3. If you're considering the real estate bifurcation strategy, loop in your broker, CPA, and attorney together. The realty LLC typically needs its own lessor's-risk policy separate from the operating company's coverage, and the paperwork needs to match the structure your tax advisor is relying on.
  4. Don't plan around rescheduling relief that hasn't arrived. Structure for today's 280E reality; treat any future change as upside, not a plan.

On the insurance side, this is where we can actually help: we regularly write separate lessor's-risk property coverage for the realty entity and distinct GL/property coverage for the operating company, so the insurance structure matches what your tax advisor needs it to look like - instead of one blended policy that leaves your CPA guessing at renewal.

Get a sense of what production-facility coverage costs with our cannabis insurance cost estimator, or talk to a Spire cannabis-specialty broker about structuring coverage across a multi-entity operation.

This article is for general information only and is not tax or legal advice. Insurance structuring alone does not create a tax position - whether any premium is deductible or includible in COGS depends on your specific facts, your entities' actual operations, and current IRS guidance. Work with a qualified CPA or tax attorney experienced in cannabis taxation before making any filing decision. Coverage is subject to underwriting and policy terms; nothing in this article is a guarantee of coverage or deductibility.