Marijuana Entrepreneurs in Colorado and Washington Prepare First Federal Tax Returns

Owners of legal marijuana businesses in Colorado and Washington state will have to file their first federal tax returns this year, CNBC reports. While the cost of growing marijuana is deductible under the federal tax code, the cost of selling it is not.

The Internal Revenue Service (IRS) will not allow usual business deductions for marijuana businesses, the article notes. Accountants and tax attorneys gathered for a marijuana tax symposium in San Diego this week to learn what can be deducted. The symposium was sponsored by the National Cannabis Industry Association.

Denver CPA Jim Marty says pretax profits in the legal marijuana industry “are very good—you can sell a pound of marijuana for about three to four times what it costs you to grow.” He said that without deductions for retail expenses “it puts you, at best, in the 60-70 percent tax bracket, and at worse, your tax bracket can actually exceed 100 percent.”

Henry Wykowski, a former federal prosecutor who is now an attorney for the marijuana industry in California, has challenged the government twice on its treatment of marijuana businesses in the tax code, with some success.

Retail marijuana businesses can now deduct the cost of goods for non-marijuana retail products in their stores, such as pipes and T-shirts. This helps them to offset the lack of other deductions.

Since many marijuana businesses deal in cash only, they are faced with the problem of how to pay their taxes. Many federally insured banks, worried that processing money from marijuana sales puts them at risk of being charged with drug racketeering, have refused to open accounts for marijuana-related businesses.

Marty says he helped devise a workaround in Colorado. “Actually, at my suggestion the IRS in Denver got cash counting machines, and now they have a separate line for cash,” he said.