It is widely known that trafficking in controlled substances is a crime under federal law. Traffickers and would-be traffickers be warned, however, that if you do choose to make income from trafficking in Schedule I or II controlled substances (including cannabis, cocaine, or psychedelic mushrooms), that income is fully taxable by the U.S. government. And, if you have employees helping you produce and sell federal Schedule I or II controlled substances (as many state-legal cannabis businesses do), you owe federal employment taxes as well.
Although cannabis businesses owe taxes just like any other business (the federal government collects billions from the industry each year), Internal Revenue Code Section 280E prohibits deductions for “any amount paid or incurred during the taxable year in carrying on any trade or business if [it] consists of trafficking in controlled substances.” Section 280E’s prohibition on the deduction of normal business expenses has been the bane of state-legal cannabis operators for close to two decades, as well as the subject of extensive enforcement action by the Internal Revenue Service (IRS) and high-profile legal challenges from the industry.
It appears clear that cannabis businesses will have to wait for cannabis/marijuana to be removed from the federal list of controlled substances before they can deduct business expenses like other legal, tax-paying American businesses. In the meantime, the IRS, in support of its own duty to continue to collect taxes from the federally illegal cannabis industry, has launched a Cannabis/Marijuana Initiative to “implement a strategy to increase voluntary compliance with the tax law” among cannabis businesses.
