Many existing medical and recreational marijuana distributors and manufacturers are feeling the economic pinch from the federal tax code on their businesses. In 1982, the U. S. tax code was amended to include section 280E, which states,
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Essentially, what this tax code section means is that businesses who are selling a Schedule 1 drug, such as marijuana, are not able to deduct some of their regular business expenses. A medical marijuana company would be able to deduct costs of the product, such as soil or fertilizer, but would not be able to deduct the cost of selling the product, such as advertising rent or even salaries for employees.
Considering it is very expensive to begin a medical marijuana business, the inability to deduct every business expense especially when operating at a loss could be detrimental for Minnesota’s two medical marijuana manufacturers. The only saving grace for Minnesota manufacturers is that since they are required to grow the product they sell, they will be able to deduct the cost of production.
A recent statistic from an association of more than 750 cannabis related businesses across the U. S. showed that marijuana businesses are paying more than 70% of their profits and taxes to the federal government.
Canna Care’s Challenge to the IRS
Earlier this year, Canna Care dispensary, a California medical marijuana dispensary, challenged the IRS over an alleged $873,167 tax penalty under section 280E. The IRS is not allowing Canna Care to deduct $2.6 million business deductions in 2006, 2007, and 2008.
Canna Care filed a petition alleging that the IRS’ refusal to accept routine business expenses violates the fourteenth amendment’s equal protection clause. A decision has not yet been reached.