Tax Laws Prevent Legal Marijuana Businesses From Taking Deductions

Legal marijuana businesses face tremendous tax bills because they cannot take deductions on rent, employee salaries or utility bills, The New York Times reports. The ban on marijuana deductions comes from a federal law aimed at drug dealers.

The law, passed in 1982, was designed to prevent drug dealers from claiming their smuggling costs and couriers as business expenses, the article notes. Congress passed the law after a drug dealer who had been jailed on drug charges went to tax court to argue the money he spent on his business should be considered tax write-offs.

The provision bans all tax credits and deductions from “the illegal trafficking in drugs.” Marijuana business owners argue the provision is preventing them from hiring more workers, and in some cases may even force them to shut down.

Some owners of marijuana businesses have challenged the provision in tax court. Earlier this year, a marijuana shop in Colorado successfully challenged an Internal Revenue Service policy that imposed about $30,000 in penalties for paying its payroll taxes in cash. Many marijuana businesses use cash because they cannot obtain bank accounts.

While businesses might pay a 30 percent federal tax rate on taxable income, once business expenses are deducted, a marijuana business may end up with a tax rate equal to 70 percent or more of profits, the article notes.

A bill introduced by Senator Ron Wyden and Representative Earl Blumenauer, both of Oregon, would allow marijuana businesses that are following their states’ legalization laws to take regular deductions on their federal returns. Oregon voted to legalize recreational marijuana last November.

Kevin Sabet, President of the anti-legalization group Smart Approaches to Marijuana, said it made no sense to give “tax breaks to companies openly violating federal law by selling marijuana gummies and lollipops.”