Congressional Researchers Analyze Whether Denying Marijuana Business Tax Deductions Under 280E Is Unconstitutional

280E marijuana tax deductions: the tab the industry can’t write off, the fight it can’t seem to win

Walk into any dispensary back office and you’ll hear it—accountants muttering like short-order cooks on a slammed Friday night—because 280E marijuana tax deductions don’t exist for them. That’s not folklore. It’s policy. The Congressional Research Service (CRS) just sharpened the knife on that point, laying out how cannabis’s Schedule I status still shackles licensed operators to a tax code that treats them like vice peddlers, not businesses. Under Internal Revenue Code Section 280E, they can’t take ordinary deductions or credits. They can only shave down gross receipts by the properly calculated cost of goods sold. The CRS report reads like a weather forecast you already felt in your bones: cloudy with a high chance of audits, and nothing but red ink if you thought constitutional arguments would save the day. If you want the primary source, the CRS put it in black and white here: Congressional Research Service analysis.

Courts to cannabis: nice try, but 280E isn’t a constitutional sin

Plenty have tried to out-lawyer 280E. Most ended the same way—staring at a tax bill you can’t expense away. In Northern California Small Business Assistants, Inc. v. Commissioner, a federally illegal-but-state-licensed marijuana business argued that 280E amounts to a punishment barred by the Eighth Amendment’s Excessive Fines Clause. The court didn’t bite. A majority said the disallowance of deductions isn’t a “penalty,” therefore the Eighth Amendment doesn’t apply. A couple judges said, even if it were a fine, the company hadn’t shown it was excessive. A few outliers hinted 280E might look like a fine but didn’t go the last mile. The takeaway? Constitutional Hail Marys haven’t moved the chains. Real relief is more likely to come from Congress or rescheduling than from a robe and gavel. Meanwhile, incremental state-level fixes keep arriving around the edges, like the compassionate step in the islands where lawmakers cleared a path for bedside care by approving patient access to medical cannabis in clinical settings—see Hawaii Lawmakers Approve Bill To Let Patients Use Medical Marijuana At Health Facilities.

Rescheduling whispers, executive orders, and a clock that won’t stop

There’s a lifeline on the horizon, shimmering like mirage heat above a stretch of federal asphalt: moving cannabis from Schedule I to Schedule III. Federal health agencies have already recommended it after a formal review. Then, in December, the president signed an executive order pushing the attorney general—Pam Bondi—to fast-track the process. Bondi is slated to face House members this week, and reform advocates want straight answers on timelines, not bromides. The Justice Department has kept its public cards close, though an official recently told Salon they’re working on the fastest lawful route. Out in the wild, consumer sentiment is miles ahead: a recent NuggMD poll found roughly 83 percent of surveyed users support the rescheduling directive. Yet in the states, the political theater keeps its elbows out; just ask Midwestern advocates who’ve been told—brusquely—to stop complaining as lawmakers reshape voter-approved frameworks, as chronicled in Ohio Governor Tells Cannabis Advocates To Stop ‘Whining’ Over Legalization Law Changes As Rollback Referendum Proceeds.

IRS: play by 280E’s rules—or get burned

Don’t mistake fog for cover. In 2024, the IRS warned cannabis companies against filing clever supplementary forms to claw back federal deductions they’re not allowed under 280E—especially without a “reasonable basis.” The agency has scolded without fully handholding. Back in 2020, the IRS finally clarified a few basics: 280E blocks ordinary and necessary deductions, but it doesn’t stop a business from reducing gross receipts by a properly calculated cost of goods sold. Also in 2020, a Treasury watchdog dinged the IRS for failing to provide more tailored guidance to cannabis taxpayers. That leaves operators threading a needle between compliance and survival. The ground rules, in plain English:

• You can’t deduct rent, marketing, insurance, or most wages the way other businesses do.
• You can reduce gross receipts by the legitimate cost of acquiring or producing inventory (COGS), carefully documented and consistent with tax accounting rules.
• Creative accounting schemes are audit bait. If it smells like a workaround, it probably is.

As policymakers recalibrate drug policy across the map, even psychedelics are inching toward regulated therapeutic lanes—witness the cautious, clinical-first recommendation up north: Alaska Government Task Force Recommends Legalizing Psychedelic Therapy Upon FDA Approval. The drug war’s tax code is creaking, but until the feds move, 280E still bites.

The bill comes due—until Washington says otherwise

Here’s the hard truth baked into every quarterly estimate: 280E inflates effective tax rates, squeezes margins, and shoves legal operators into a Hunger Games with untaxed illicit sellers. Rescheduling to Schedule III would defang 280E and let this industry act like what it is: a legitimate market with payrolls, leases, and ledgers. But the clock in Washington is never in a rush. In the meantime, pressure has to come from both sides of Pennsylvania Avenue. States can keep modernizing their frameworks—urging executive leadership, coalition-building, and honest math about legal cannabis revenue—and advocates in places like the Keystone State are saying the quiet part out loud: it’s time to lead, convene both parties, and cut a deal, as argued in Pennsylvania Governor Should Lead On Marijuana Legalization By Convening Bipartisan Lawmakers For Negotiations, Advocates Say. Until rescheduling lands and 280E loosens its grip, operators will keep paying their tab without the benefit of a receipt—so if you’re ready to explore what’s next at the consumer level, take a thoughtful stroll through our curated selections here: https://thcaorder.com/shop/.