Cannabis businesses face unique tax requirements under Internal Revenue Code Section 280E. The IRS has applied Section 280E to state-legal cannabis businesses since cannabis is still a Schedule I substance under federal law.
- 280E applies to disallow federal tax deductions and tax credits of state-legal but federally illegal cannabis companies.
- Cannabis companies may only deduct Cost of Goods Sold to compute federal taxable income.
- While federal effective tax rate on corporations is 21% or less, the effective tax rate on cannabis companies can be 70% or 80% or more because of 280E.
Many states have exempted state legal cannabis businesses from the state tax code equivalent of IRC 280E. While SB47 did not address 280E, the Kentucky legislature is expected to make some changes to SB47 during the next legislative session. Additionally, the federal government is considering rescheduling cannabis from a Schedule I drug to a Scheduled II or Schedule III drug. If cannabis is rescheduled to a Schedule III drug under the federal Controlled Substances Act, IRC 280E will no longer apply. Companies who are interested in entering the legal cannabis space, should reach out to their representative or engage government relations professionals to advocate for this change.
