It is widely known that trafficking in controlled substances is a crime under federal law. Traffickers and would-be traffickers be warned, however, that if you do choose to make income from trafficking in Schedule I or II controlled substances (including cannabis, cocaine, or psychedelic mushrooms), that income is fully taxable by the U.S. government. And, if you have employees helping you produce and sell federal Schedule I or II controlled substances (as many state-legal cannabis businesses do), you owe federal employment taxes as well.

Although cannabis businesses owe taxes just like any other business (the federal government collects billions from the industry each year), Internal Revenue Code Section 280E prohibits deductions for “any amount paid or incurred during the taxable year in carrying on any trade or business if [it] consists of trafficking in controlled substances.” Section 280E’s prohibition on the deduction of normal business expenses has been the bane of state-legal cannabis operators for close to two decades, as well as the subject of extensive enforcement action by the Internal Revenue Service (IRS) and high-profile legal challenges from the industry.

It appears clear that cannabis businesses will have to wait for cannabis/marijuana to be removed from the federal list of controlled substances before they can deduct business expenses like other legal, tax-paying American businesses. In the meantime, the IRS, in support of its own duty to continue to collect taxes from the federally illegal cannabis industry, has launched a Cannabis/Marijuana Initiative to “implement a strategy to increase voluntary compliance with the tax law” among cannabis businesses.

Launched by Small Business/Self-Employed Examination Unit Commissioner De Lon Harris, the initiative oversees compliance of businesses with less than $10 million of assets. The initiative endeavors include:

  • Providing training and job aids to IRS examiners working cases so they can conduct quality examinations (audits) consistently throughout the country.
  • Ensuring a coordinated and consistent approach by the IRS to the cannabis/marijuana industry.
  • Finding ways to identify noncompliant taxpayers.
  • Collaborating with external stakeholders to increase an awareness of tax responsibilities to improve compliance.
  • Giving taxpayers access to information on how to properly comply with filing requirements.

In his introductory letter, Commissioner Harris promises that the Cannabis/Marijuana Initiative will not be limited to posting information on the IRS’s website, but that the Small Business/Self-Employed Unit (SB/SE Unit) will “engage with the cannabis/marijuana industry through speaking events and other outreach.” The letter includes other relevant tips for the industry, such as “know your investors,” “report your cash transactions,” and “keep good records.” This may evidence that the SB/SE Unit is in touch with some of the cannabis industry’s primary pain points, but it’s also clear that enhanced enforcement is a big motivator as well. For an industry that has long had a complicated relationship with the federal government, this new IRS attention will likely receive mixed reviews.


Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.