A shop has $2,400,000 in receipts, $1,300,000 of cost of goods sold and $780,000 of operating expenses. Using a 21% federal rate and no state tax:
Ordinary business
Subject to 280E
Gross profit
$1,100,000
$1,100,000
Operating expenses deducted
$780,000
$0
Taxable income
$320,000
$1,100,000
Federal tax at 21%
$67,200
$231,000
Cash left after tax
$252,800
$89,000
What moves the gap
Operating expense ratio. The more of gross profit that goes to rent, payroll and marketing, the bigger the difference, because those costs stop reducing the tax base.
What counts as cost of goods sold. COGS reduces receipts under 280E, so correctly classifying inventoriable costs is the one lever. Which costs qualify depends on whether you resell or produce, and is a question for a tax professional.
State conformity. Some states do not follow 280E and tax real profit at the state level; others do. The tool has a switch.
Federal scheduling. 280E reaches only Schedule I and II substances. Check the status for your tax year.
Try your own numbers
Open the calculator to see your gap, a table of how tax changes with operating expenses, and what a reclassification would be worth.