IRS Win: Cannabis Wages Excluded from Qualified Business Income!

Many eligible small business owners enjoy a tax deduction based on their qualified business income (QBI). To be deductible for QBI purposes, expenses must be “allowed in determining taxable income.” The U.S. Tax Court recently denied the shareholders of two S corporations engaged in cannabis sales from including wages when calculating the QBI deduction. Tax law bars deductions for expenses of businesses trafficking in controlled substances when calculating taxable income, and cannabis is a controlled substance for federal purposes. Therefore, those expenses can’t be used for the QBI deduction. Both entities paid significant W-2 wages. (165 TC No. 5, 9/11/25)