As of February 2025, cannabis companies across the United States remain heavily impacted by tax limitations imposed under Section 280E of the Internal Revenue Code. This regulation prevents businesses involved with controlled substances, including cannabis, from deducting standard operating expenses on their federal tax filings. As a result, these companies often face significantly higher tax rates compared to businesses in other industries.

Understanding Section 280E

Initially enacted in 1982 to prevent drug dealers from writing off business costs, Section 280E has since been broadly applied to state-legal cannabis companies due to marijuana’s continued classification as a Schedule I substance under federal law. While these businesses can deduct the cost of goods sold (COGS), other essential expenses such as rent, payroll, and utilities remain non-deductible. This taxation structure leads to substantially higher effective tax rates, sometimes exceeding the 21% corporate tax rate applied to traditional businesses.

Legislative Efforts to Keep 280E in Place

In early 2025, Senators James Lankford (R-OK) and Pete Ricketts (R-NE) introduced a bill known as the “No Deductions for Marijuana Businesses Act.” The legislation aims to keep tax restrictions on cannabis companies intact, regardless of whether marijuana is rescheduled under the Controlled Substances Act (CSA). The bill would explicitly prevent businesses selling marijuana from claiming tax deductions or credits, even if the substance is reclassified at the federal level. Defending the proposal, Senator Lankford stated, “Businesses that sell drugs classified as illegal under federal law—including marijuana—should not be entitled to federal tax benefits.”

The Impact of Potential Rescheduling

Discussions surrounding the possible reclassification of cannabis from a Schedule I to a Schedule III drug have sparked debate about the future of Section 280E. If marijuana were moved to Schedule III, it could allow cannabis businesses to deduct operational expenses, easing their tax burden. However, the proposed “No Deductions for Marijuana Businesses Act” seeks to prevent this outcome, ensuring that the tax limitations imposed by Section 280E remain intact, even if cannabis is rescheduled.

Industry Reactions and Future Outlook

Many within the cannabis sector had hoped that rescheduling would bring long-awaited tax relief. However, the prospect of continued restrictions has raised concerns, especially among small businesses that already struggle with limited profit margins. The inability to deduct routine expenses creates a financial strain, making it difficult for many cannabis operators to remain competitive.

As legislative discussions continue, the cannabis industry faces ongoing uncertainty about its tax obligations. Business owners and industry advocates continue to push for tax reforms that would align cannabis companies with other legal enterprises. Many argue that meaningful policy changes are necessary to ensure the long-term sustainability of the market.

For now, Section 280E remains a major hurdle, and unless significant federal changes occur, cannabis businesses will continue to navigate the financial challenges posed by current tax regulations.