Reed Smith Client Alerts

Currently eight states regulate recreational adult-use cannabis1 and twenty-eight states and Washington D.C. allow the use of medically prescribed cannabis.2 The legalization of both recreational and medically prescribed cannabis led to nearly $9 billion in sales in 2017 along with a corresponding tax windfall in many of these states. As the legal cannabis industry grows at an exponential pace, cannabis businesses should be aware of the various tax implications facing the industry.

Authors: Shail P. Shah

Cannabis farm

State Income Tax and Internal Revenue Code (IRC) Section 280E 

For federal income tax purposes, IRC Section 280E prohibits deductions for expenses incurred by operating “any trade or business…that consists of trafficking controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”3 Marijuana is a Schedule I controlled substance, and the IRS uses section 280E to disallow cannabis businesses from deducting ordinary and necessary business expenses.