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Why legalize cannabis when 280E is the gift that keeps on giving to the Federal government?
Whitney Economics, a cannabis research firm, recently conducted a comprehensive analysis of the impact of federal taxes on the cannabis industry. The findings revealed that in 2022, cannabis operators incurred an astonishing $1.8 billion in additional taxes compared to conventional businesses. Looking ahead, it is projected that this excess burden will rise even further to reach $2.1 billion in 2023.
The Reason Behind The Higher Tax Burden for Cannabis Operators
Despite the growing number of states that have legalized medicinal or adult-use cannabis operations, cannabis’ classification as a Schedule I controlled substance under the Controlled Substances Act (CSA) remains unchanged.
Under this classification, cannabis businesses that operate per state law are deemed criminal enterprises engaged in the trafficking of a controlled substance under federal law. This label treats law-abiding business owners and operators as drug dealers peddling substances as harmful as cocaine and heroin. As such, these businesses are subjected to Section 280E.
Section 280E is a provision that punishes those involved in the trafficking of Schedule I or II drugs by prohibiting the deduction of “ordinary and necessary” business expenses. This includes below-the-line deductions, even after reducing gross receipts by the cost of goods sold (COGS). This results in federal income tax liability being calculated based on gross income rather than net income.
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