A small section of the tax code provision originally written for illegal drug dealers is causing issues for legitimate marijuana dispensaries in Colorado, California, Arizona, and 15 other states where marijuana or medical marijuana is legal.
In states like Colorado, where marijuana is legal, income tax rates for dispensaries can be as high as 70 percent because the tax code does not allow the businesses claim certain deductions. The tax code section that causes these issues is known as 280E and was originally penned for illegal drug traffickers.
The existing tax code could make Colorado’s expansion to the recreational marijuana and risky choice for business owners. These issues arise in the 18 state where some form of marijuana is legal because marijuana is still listed as a schedule-I drug federally.
The provision in the tax code does not allow for marijuana dispensary operates to make certain deductions on anything related to the sale of marijuana, like advertising costs. Dispensaries are allowed to make deductions on the costs associated with growing the plant.
The result? Many dispensaries have included the deductions they feel they rightly deserve on their tax forms. Doing this insures that these small businesses are in for an IRS audit. This legal balancing act can be resolved by congress or the court system.