On April 9, 2015, Rep. Earl Blumenauer and Sen. Ron Wyden announced that they will introduce the Small Business Tax Equity Act of 2015 in Congress next week. The purpose of the bill is to amend Section 280E of the Internal Revenue Code to allow a business operating in compliance with state law to take deductions associated with the sale of marijuana as any other legal business does. Similar measures were introduced in 2011 and 2013, but died in committee.
Specifically, Section 280E provides that:
“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.”
Enacted in 1982, at the height of the War on Drugs, the Code section was designed to prevent illegal drug dealers from claiming the cost of items such as guns or boats as deductible business expenses. Today, however, the law prevents legal marijuana businesses from deducting the common expenses of running a business, such as rent, utilities and payroll. They cannot claim the Work Opportunity Tax Credit if they hire veterans, and they are limited in lawful deductions relating to construction or operation costs if they want to remodel a building for their retail operations.
As a consequence, dispensaries and growers may find themselves paying federal income tax at a rate as high as 90 percent, compared to an effective rate of around 20 percent paid by other small businesses, according to the Small Business Administration. The tax rate can be the difference between survival and failure for a fledgling business.
The 2013 proposal, on which the new bill is likely to be modeled, simply adds the following 15 words at the end of 280E as it currently exists: “unless such trade or business consists of marijuana sales conducted in compliance with State law.”
The amendment would clearly apply only to those businesses acting within the law in the 35 states that have legalized cannabis sales in some form. The law will likely provide only prospective relief. It does, however, rationalize a conflict between state and federal law that advances none of the eight enforcement priorities outlined in Department of Justice’s Cole memorandum.
The anticipated 2015 bill has already gathered support from Americans for Tax Reform, Drug Policy Alliance, Marijuana Policy Project, Americans for Safe Access, NORML, the National Cannabis Industry Association and Grover Norquist, head of Americans for Tax Reform.
On Tuesday, April 21, the Marijuana Investor Summit in Denver will feature a break-out session on Section 280E compliance co-hosted by Adam Fayne of Arnstein & Lehr LLP and Jim Marty of Bridge West LLC. The session is designed to assist investors and cannabis entrepreneurs unravel the complexities of Section 280E and other financial issues faced by the legal marijuana industry today.