The legal cannabis industry in the United States is larger right now than at any other point in this nation’s history. Two dozen states have legalized cannabis for adult use, and forty states have adopted medical cannabis, with there being some obvious overlap in states that have adopted both. Washington D.C. has adopted both medical and recreational cannabis legalization.
A recent market analysis and report by Vangst Staffing and Whitney Economics determined that the legal cannabis industry in the United States sold roughly $30.1 billion worth of cannabis products in 2024. The report also found that the legal U.S. industry supports 425,000 full-time jobs.
Yet, despite the increasing success of the emerging legal cannabis industry in the United States at the local level, cannabis remains a Schedule I substance at the federal level. One of the biggest issues that the state versus federal categorization of cannabis creates is when it comes to taxes.
Many legal cannabis businesses pay a considerably higher tax rate compared to businesses in other industries due to the 280E provision in the federal tax code. For folks who have been living under a rock and do not know about 280E, it is a component of federal tax law that prohibits certain cannabis businesses from writing off many regular business expenses.
“Tax that the business pays is calculated based on the taxable income figure, which can be greatly affected by the allowable business expenses that are subtracted from that year’s total income. The corporate tax rate is 21%, and small businesses often pay less.” explains the Marijuana Policy Project (MPP) on its website.
“With state-legal cannabis businesses, owners cannot make use of these tax breaks, and they end up paying taxes on their gross income, rather than an adjusted amount like other businesses. These tax rates often end up being 70% or higher, making it exceptionally costly to own a cannabis business.” MPP also states.
” Section 280E of the Internal Revenue Code prohibits businesses from deducting otherwise established business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.” MPP concludes.
There has been a push underway at the federal level to reschedule cannabis from its current listing as a Schedule I substance to a Schedule III substance. While the odds of federal cannabis rescheduling happening soon are debatable, the positive impact it would have on U.S. cannabis businesses if/when it does happen is undeniable.
“The proposed rescheduling of cannabis would result in a lower tax burden and increase cash flows. In 2024, the cannabis industry is forecasted to pay an additional $2.3 billion in excess taxes as a direct result of the current scheduling policy. Without reform, this excess tax burden in expected to increase to $5.2 billion by 2030.” stated Beau Whitney, founder of Whitney Economics, about an analysis that he conducted last year.