How Current Tax Law Policy Affects the Marijuana Industry

Abstract

Despite marijuana sales being legalized in many states, businesses engaged in such activities are penalized by current tax law. IRC Section 280E disallows deductions for ordinary and necessary expenses for taxpayers trafficking in Schedule I or II controlled substances. The Controlled Substance Act (CSA) lists marijuana on Schedule I alongside LSD, heroin, and methamphetamine, lumping these drugs together as having ‘‘no currently accepted medical use and a high potential for abuse.’’ That imposes a financial hardship on businesses that abide by state laws that allow the production and sale of marijuana. Under section 280E, businesses that legally sell marijuana must file federal income tax returns but are not allowed to deduct business expenses other than the cost of sales, which can cause an otherwise profitable, largely cash-basis business to have insufficient funds to pay its income tax liability. Because the rule applies only to businesses involved with selling Schedule I drugs, section 280E penalizes state-legalized marijuana businesses relative to other illegal activities such as racketeering, forgery, fraud, and thievery.

Keywords: Cannabis, Marijuana, 280E, Tax Law, Tax Policy

JEL Classification: K34