While cannabis (or marijuana) is legal in some states for medical and recreational use, cannabis is still a Schedule 1 narcotic for federal purposes. Because of this, Section 280E of the Internal Revenue Code applies. Section 280E disallows deductions or credits “for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business… consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. Therefore, for federal tax purposes, cannabis businesses are taxed on their gross revenue – with no business deductions or credits. Cost of Goods Sold (COGS) however does offset Gross Income. As a result, a cannabis businesses federal and state taxes look very different. Some cannabis businesses try to bifurcate business activities to separate out the cannabis portion in an attempt to limit the deduction and credits limitations. Such structures have been the subject of much tax litigation recently – with the tide favoring the IRS presently.