Cannabis companies have spent years trying to escape one of the industry’s biggest financial headaches: Section 280E of the federal tax code. So far, the IRS isn’t budging.
In a new court filing, the Internal Revenue Service pushed back against a cannabis company’s argument that it shouldn’t have to follow the rule that blocks marijuana businesses from claiming many normal tax deductions.
Section 280E basically says that businesses involved in selling substances listed as Schedule I or Schedule II drugs can’t deduct typical expenses like rent, payroll, or utilities from their federal taxes. Since marijuana is still classified as a Schedule I drug under federal law, the rule hits cannabis companies especially hard.
The company in the case tried to argue that courts should effectively treat marijuana differently because of how state legalization and federal enforcement policies have evolved. But the IRS told the court that argument doesn’t hold up.
According to the agency, the law is pretty straightforward: marijuana remains illegal under the Controlled Substances Act, and until Congress or federal regulators change that status, the tax rule still applies.
The IRS also rejected the idea that temporary congressional spending provisions—like those that limit federal interference with state medical marijuana programs—change the underlying legality of cannabis. Those budget riders restrict enforcement in certain situations, the agency said, but they don’t rewrite federal drug law or the tax code.
For cannabis businesses, the outcome of cases like this matters a lot. Section 280E often leaves companies paying far higher effective tax rates than most other industries because they can only deduct the cost of producing goods, not the everyday expenses of running a business.
Until federal law changes, though, the IRS position appears pretty clear:
If you’re selling cannabis, the tax bill still applies—even if your state says the business is perfectly legal.
Dabbin-Dad Newsroom
