Application of Internal Revenue Code Section 280E to Marijuana Businesses: Selected Legal Issues [March 10, 2021] [open pdf - 988KB]
From the Summary: "The marijuana industry has grown as an increasing number of states have relaxed state law prohibitions on the use of marijuana for medical and recreational purposes. Under federal law, marijuana remains classified as a Schedule I controlled substance under the Controlled Substances Act (CSA), meaning that the production, distribution, and possession of marijuana remains illegal, except in the narrow context of federally approved research studies. Regardless of marijuana's status under federal or state law, marijuana businesses are subject to the federal income tax. The Schedule I status of marijuana means that marijuana businesses are treated differently from many other businesses for tax purposes. Internal Revenue Code (IRC) Section 280E (Section 280E) denies deductions and credits for amounts paid or incurred in carrying on the trade or business of trafficking controlled substances (within the meaning of Schedules I and II of the CSA) in violation of federal or state law. Consistent with marijuana's classification as a Schedule I controlled substance, Section 280E disallows taxpayers from taking tax deductions and claiming tax credits attributable to marijuana businesses. [...] Recent legislative proposals aim to relax federal restrictions on marijuana or to mitigate the disparity between federal and state marijuana regulation. Many of these proposals would alter the tax treatment of marijuana businesses by re-scheduling or descheduling marijuana under the CSA or by making marijuana-specific exceptions. Under these proposals, Section 280E would no longer prohibit marijuana businesses from taking deductions and credits."
CRS Report for Congress, R46709
Congressional Research Service: https://crsreports.congress.gov/