A federal court has ruled that marijuana businesses are not eligible for COVID-era employee retention tax credits (ERC) due to Section 280E of the Internal Revenue Code. The decision reinforces the IRS’s position that cannabis companies, despite operating legally at the state level, are barred from receiving federal tax benefits.
The case involved a Washington-based cannabis company that applied for ERC relief under the CARES Act, a program designed to support businesses that retained employees during pandemic-related economic disruptions. While other industries received billions in aid, cannabis companies were left in a gray area. This recent court ruling makes it clear: Section 280E applies to all forms of federal tax benefits, including employment-related credits.
Section 280E is a federal tax provision that disallows any business that traffics in Schedule I or II substances from claiming normal business deductions or credits. While it has long affected income tax filings, this ruling is the first to directly apply 280E to employment tax credits—setting a precedent with potentially sweeping consequences for the cannabis industry.
The court emphasized that even though the ERC is a refundable payroll tax credit—not an income tax credit—it still falls within the scope of 280E. As a result, cannabis companies who may have previously claimed the credit or received refunds could now be subject to audits or repayment demands from the IRS.
Legal analysts warn that this decision could prompt more aggressive enforcement actions, particularly as the IRS continues to scrutinize cannabis-related businesses. Several firms across the U.S. are reportedly under audit for claiming the ERC, and the outcome of this case may embolden further crackdowns.
For cannabis operators, the ruling is another example of how federal prohibition continues to impose costly hurdles. Even as states expand legalization and treat cannabis companies as essential businesses, outdated federal tax policies continue to deny them the same relief and support afforded to every other industry during the pandemic.
The decision underscores the urgent need for congressional action to reform or repeal Section 280E and to reschedule marijuana under federal law. Until then, cannabis companies must remain cautious and fully aware of the tax limitations that come with operating in a federally restricted industry.
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