Why Weed Businesses Pay Federal Taxes Even Though They’re Illegal
It sounds crazy, right? The federal government says marijuana is illegal but still wants tax money from marijuana businesses. Here’s why cannabis businesses have to pay federal income taxes even though they’re illegal.
The Federal Government Wants Money From Everyone
The IRS doesn't care if your business is legal or illegal - they want their cut of ANY money you make. Even bank robbers are supposed to pay taxes on stolen money! As one expert put it, the IRS wants "an industry – one that is illegal under federal law – to obey U.S. tax laws and pay its taxes."
The Double Whammy: 280E
But here's where cannabis businesses get treated unfairly:
Other businesses pay taxes only on their profits — the money left after expenses
Cannabis businesses have to pay taxes on almost all their income because of Section 280E of the tax code
What is 208E?
It's a tax rule from 1982 that says if you sell illegal drugs, you can't deduct normal business expenses. It states: "No deduction or credit shall be allowed... on any trade or business if such trade or business... consists of trafficking in controlled substances.”
An Example with Simple Math
Let's say you have two stores that each make $1,000,000:
Normal store:
Makes: $1,000,000
Expenses (rent, workers, etc.): $700,000
Profit: $300,000
Tax (21% of profit): $63,000
Money left after tax: $237,000
Cannabis store:
Makes: $1,000,000
Expenses (rent, workers, etc.): $700,000
Profit: $300,000
Tax (could be 80% of the FULL $1,000,000): $800,000
Money left after tax: NEGATIVE $500,000!
See the problem? The cannabis store might owe more in taxes than it even made in profit.
Does 280E Apply to State Income Taxes?
Some states, including Maine, do not penalize cannabis businesses. So, things that cannot be deducted on a federal income return can be deduced on the state tax return.
The Bottom Line
So there you have it - cannaibs businesses pay taxes because:
Everyone has to pay taxes on income (legal or not)
Cannabis businesses can't deduct normal expenses because of 280E
This means they pay significantly higher taxes than normal businesses
The federal government is basically saying "We think what you're doing is illegal, but we still want your money... and extra money too."