The dollars were flowing into Bruce Nassau’s five Colorado marijuana dispensaries when his financial adviser called with bad news: The 2014 tax season was coming up, and Mr. Nassau could not rely on the galaxy of deductions that various businesses use to lower their tax bills. Mr. Nassau was going to be in debt with the IRS for a small fortune.
“I had to write a check for $275,000,” Mr. Nassau stated. “Unbelievable.”
Americas rapidly growing cannabis industry has a tax issue. Even as more states accept the idea of legal marijuana, dispensaries say they are being forced to pay devastating federal income taxes because of a law that is decades old which is aimed at preventing drug dealers from claiming their smuggling cost and couriers as a business expense on their tax returns.
Back in 1982 Congress passed a law after a cocaine and methamphetamine dealer in Minneapolis who had been sentenced to jail on drug offenses went to tax court to discuss that the funds that he used on travel, phone calls packaging and a small scale should be recognized as a tax write offs. The provision still enforced by the I.R.S. bans all tax credits and deductions from “the illegal trafficking in drugs.”
Cannabis business owners say it stops them from deducting their rent, worker salaries or utility bills, making them pay taxes on a far large amount of revenue than non-cannabis businesses with the same earnings and overhead expenses. They also say the taxes, which apply to medical and recreational sellers alike, are stunting their hiring, or even threatening to drive them out of business.
The problem displays a growing chasm between the 23 states, plus the District of Columbia, that allow medical or recreational cannabis and the federal bureaucracy, which involves national forest in Colorado where possession is federal offense, federally regulated banks that turn away cannabis businesses and the halls of the I.R.S.
Though President Obama and top federal officials have allowed states to proceed with legalization, cannabis supporters say the dissonance between increasingly permissive state laws and federal prohibitions is developing a morass of complications and uncertainty.
The tax guideline, is an obscure provision referred to as 280E, catches different cannabis entrepreneurs by surprise, more time than not in the form of an audit notice from the I.R.S. Some pot businesses in Colorado, California as well as other cannabis friendly states have challenged the I.R.S. in tax court.
“We’re talking about legal businesses, licensed businesses,” stated Rachel Gillette, the executive director of Colorado’s chapter of the National Organization for the Reform of Marijuana Laws as well as being the lawyer who represented Allgreens. “There’s no reason that they should be taxed out of existence by the federal government.”
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