Section 280E of the Internal Revenue Code (IRC) explicitly prohibits businesses engaged in the trade or distribution of either Schedule I or Schedule II controlled substances from deducting expenses on their federal taxes.
Because marijuana is still federally recognized as a Schedule I substance under the Controlled Substances Act, state-legal cannabis businesses that operate in adult and medical-use markets cannot deduct their ordinary business expenses from their federal taxes. In short, these businesses, despite being authorized under state laws, are still considered drug traffickers in the eyes of the IRS, and as such, are liable under the provisions of Section 280E.
This translates to entirely state-legal cannabis businesses paying astronomically higher taxes than any other business. According to one recent economic analysis, in 2022, cannabis operators paid in excess of $1.8 billion in additional taxes. This excess tax burden is destroying cannabis businesses financially.
To combat this, several states have enacted legislation addressing 280E in order to assist in easing business’ state-level tax burden. These states include; California, Colorado, Connecticut, Illinois, New Jersey, and Oregon. Other states are considering enacting similar legislation , including New York and Pennsylvania.
However, while these state-level changes may reduce some of the excessive tax burdens facing these businesses, they cannot provide federal tax relief – which can only be accomplished by either the passage of explicit federal 280 E reform or by the removal of cannabis from the Controlled Substances Act.