Congressional Researchers Analyze Tax Implications for Marijuana Businesses

Report examines whether denying cannabis companies tax deductions under 280E is unconstitutional

Published on Feb. 10, 2026

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Congressional researchers have released an analysis of tax implications for cannabis businesses under current federal law, including a review of the idea that depriving the industry of the ability to take federal tax deductions amounts to a constitutional violation.

Why it matters

The report highlights the ongoing challenges facing the marijuana industry due to the plant's Schedule I status under federal law, which prevents cannabis businesses from claiming standard tax deductions available to other industries. This issue has significant financial implications for the legal cannabis sector.

The details

The Congressional Research Service (CRS) report examines the application of IRS code 280E, which 'disallows taxpayers from taking tax deductions and claiming tax credits attributable to marijuana businesses.' Despite attempts to contest 280E, the cannabis industry has 'generally been unsuccessful' in pleading their case in court and 'likewise have not succeeded in their attempts to challenge Section 280E on constitutional grounds.'

  • In 2024, the IRS warned the marijuana industry that some companies have, without a 'reasonable basis,' filled out a supplementary form in an attempt to take federal tax deductions that they're prohibited from receiving under 280E.
  • In 2020, the IRS provided some guidance on 280E, explaining that while cannabis businesses can't take standard deductions, the code does not 'prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.'

The players

Congressional Research Service (CRS)

A nonpartisan research arm of the United States Congress that provides policy and legal analysis to members of both the House and Senate, as well as their committees and staff.

Internal Revenue Service (IRS)

The revenue service of the United States federal government responsible for administering and enforcing federal tax laws.

Northern California Small Business Assistants, Inc.

A marijuana business that challenged a notice of deficiency from the IRS that explained how 280E 'disallowed the taxpayer's deductions.'

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What’s next

If cannabis is moved from Schedule I to Schedule III of the Controlled Substances Act, as federal agencies have proposed, the marijuana sector may receive relief from 280E. However, it remains unclear when this rescheduling process might be finalized.

The takeaway

The report highlights the ongoing tax challenges facing the legal cannabis industry due to the plant's federal Schedule I status, which prevents businesses from claiming standard tax deductions available to other industries. This issue has significant financial implications for the sector and could potentially be addressed through federal marijuana rescheduling.