The Controlled Substances Act classifies marijuana as a Schedule 1 drug, meaning that, under Federal law selling marijuana is an illegal business. This is true even if the business in located in a state that allows the sale of medical or recreational marijuana. The tax effect of this is two-fold. First, the profits from the business are taxable, even though the business is operating illegally. Second, due to the classification of marijuana, someone in such a business will find that their deductible expenses are severely limited. They can deduct cost of goods sold, but operating expense are not deductible. In addition, a marijuana business may have difficulty opening a bank account, as Federal law prohibits a bank from knowingly accepting business accounts from business selling illegal drugs. for more detail on the ramifications of tax laws on a marijuana businesss, see my blog entry at www.taxconnections.com/taxblog/tax-issues-for-a-marijuana-business-legal-and-illegal/.