Internal Revenue Code Section 280E states "[n]o deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Currently, the IRS considers state-compliant cannabis businesses as federally illegal. Thus, according to the IRS, marijuana and products derived from marijuana are subject to Section 280E. This means that cannabis businesses are not entitled to take deductions for advertising, employee wages, technology, accounting, rent, administration, improvements, and other expenses that an otherwise "legal" business is entitled to take. The effect of this interpretation? Cannabis businesses are taxed on gross income and are paying a tax rate 3.5 times higher than a business that is not "trafficking" in a controlled substance.
Click on the link below and watch this video to learn more about 280E.