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

OG article by Kyle Jaeger

February 10, 2026

The Congressional Research Service (CRS) examined whether Internal Revenue Code Section 280E unconstitutionally denies tax deductions and credits to marijuana businesses, as they involve Schedule I controlled substances under the Controlled Substances Act. Unlike other industries, cannabis operators cannot deduct ordinary business expenses, resulting in higher effective tax burdens and repeated legal challenges. Courts have largely upheld 280E; in Northern California Small Business Assistants, Inc. v. Commissioner, the Tax Court ruled disallowance is not an Eighth Amendment "penalty," with concurring opinions varying on excessiveness. Historical attempts to invalidate 280E on constitutional grounds have failed. The IRS allows cost-of-goods-sold reductions to gross receipts but offers limited guidance and warned against improper claims in 2024. Potential relief could follow rescheduling marijuana from Schedule I to III, as proposed under the Biden administration and advanced by President Trump’s December 2025 executive order directing Attorney General Pam Bondi—though no Justice Department progress has been reported. The CRS report highlights ongoing debates about 280E’s viability if rescheduling occurs, plus possible legislative reforms to address inequities for state-legal cannabis businesses facing federal tax restrictions.