In a lot of different ways legal cannabis is one of the sexiest topics of conversation today. From the potential medical breakthroughs to the astronomical growth of revenue in the last few years to legalization campaigns spreading across the country, legal marijuana is a hot topic in media, around office water coolers, and in all corners of the blogosphere. In conversational terms it’s the exact opposite of taxes, which nobody ever wants to talk about unless they are absolutely forced to. The current tax code, however, is one of the more significant hurdles faced by cannabusinesses that touch the plant, such as cultivators, dispensaries, and extraction/infusion kitchens.
U.S. Code 280e states:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise 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.”
This means that businesses operating under state-legal cannabis programs cannot deduct any business costs (rent, operating costs, etc) from Federal taxes. The New York Times reports that this could be the difference between being taxed on 30% of gross income for a traditional business to being taxed on 70% of gross income for a legal cannabusiness – in some cases a difference of hundreds of thousands of dollars.
The code was added in the 80s when a cocaine and meth trafficker went to tax court to argue that the operating costs of his illegal drug trade were tax deductible. In current times, though, it not only punishes businesses operating legally in 23 states, but it also goes against the grain of the federal government’s recent stance to not punish businesses in the marijuana space that are compliant with state regulations.
As of today there are two efforts underway to change the way cannabis companies are taxed in the U.S. A Colorado dispensary is challenging the statute in court with lawyers stating, “While marijuana is a controlled substance … Colorado’s dispensing of medical marijuana is not in violation of the (Controlled Substances Act).” Additionally, the Small Business Tax Equity Act of 2015 has been submitted in both the House (H.R. 1855) and the Senate (S. 987). The bill would create an exemption in 280e for businesses that touch the cannabis plant that are compliant with state laws.
Success in either of these endeavors will go a long way toward easing the onerous tax burdens faced by owners operating state-legal businesses, and will further establish the legitimacy of cannabis business owners in the eyes of the law.