Policy Guides

The Essential Guide to Cannabis: Tax Policy

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Marijuana businesses now pay federal tax rates that can approach 70% or higher.

That's largely because they can't take advantage of typical exemptions — including for salaries and benefits — that reduce tax bills for most businesses. Federal tax code section 280e states that no tax deductions or credits are allowed for expenses incurred “if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances.”  This means that cannabis businesses, be they dispensaries or farms or processors, cannot deduct any business expenses. So in your first year of business, you may operate at a loss or, if lucky, break-even - but you are taxed only on your gross. The IRS has a tax repayment plan for that.

Presidential candidates have not yet taken any specific stances on what to do about 280e, but democratic candidates backing legalization argue more broadly that by regulating and taxing marijuana at the federal level, tax revenues can be vastly increased while still reducing the burden for individual businesses.

Supreme Court in late June 2019 declined to hear a case brought by Colorado-based company Alpenglow Botanicals, which argued that the IRS doesn’t get to decide that a cannabis company has violated federal law. The US Government said yes because 280e specifically applies to businesses that “consist of trafficking in controlled substances.” [MJ Biz Daily] [Gov argument PDF] [Alpenglow petition]

Senator Ron Wyden (D-Ore.) has also introduced a bill, the Small Biz Tax Equity Act of 2019, that would exempt marijuana businesses in compliance with state law from 280e. It currently has three co-sponsors: Sen. Rand Paul (R-Ky.), Sen. Michael Bennett (D-Colo.), Sen. Patty Murray (D-Wash.) and Sen. Jeff Merkley (D-Ore.)

Download the full chapter here.

Read more from POLITICO Pro Cannabis here

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