A bill that would allow the same tax deductions for marijuana-related business as other businesses is gaining traction in Washington.
On Thursday, the National Cannabis Industry Association, the sole national trade association in the U.S. working to advance the interests of cannabis-related businesses, announced a new piece of legislation that would essentially force the federal government to tax marijuana-industry related businesses at the same rate as all other small businesses.
HR 2240, also known as the “Small Business Tax Equity Act,” would add an exception for legal marijuana businesses in states that have legalized the substance to Section 280E of the Internal Revenue Code, which currently creates a gross receipts tax situation for legal cannabis dispensaries and other marijuana-related businesses. Other supporters include Grover Norquist’s group Americans for Tax Reform — which NCIA is a member of — and Rep. Earl Blumenauer (D-Ore.).
Under current tax law, marijuana dispensaries in states that have legalized marijuana are unable to claim the ‘ordinary and necessary’ business expense deductions that other legal businesses can claim because of marijuana’s legal status federally. Under the Controlled Substances Act, marijuana is a Schedule I substance, meaning the government considers it to be highly addictive and prone to abuse, with no medicinal value.
Due to this classification, income from the sale of marijuana is taxable, but all other business expenses such as wages and salaries, health and other insurance premiums, rent, pension plans, equipment, utility costs and more, are not deductible and negatively affect the company’s taxable profit. In essence, they pay a gross receipts tax instead of an income tax.
For example, if two nearly identical businesses each have $500,000 in business revenue and one was a marijuana-related business, each business is allowed to deduct the cost of goods sold — say, $250,000 — but only the non-marijuana business can deduct ‘ordinary and necessary’ business expenses. While the non-marijuana business might deduct, for example, $150,000 of ordinary and necessary business expenses, the marijuana business cannot because it’s restricted by Sec. 280E.
If both businesses were taxed at a 35 percent tax rate, the marijuana business would pay a tax bill $52,500 greater than the other and an average effective tax rate much higher than the non-marijuana business. The only reason is that this business cannot deduct the same expenses as any other business. According to the bill’s supporters, this creates a huge disincentive for the marijuana-related business to hire more workers, increase wages, provide additional benefits, or invest in things like infrastructure improvements.
In a press release, Rep. Blumenauer said, “Small, legal marijuana businesses are being victimized by the tax code. They cannot deduct their business expenses like all other businesses. Then cannot claim advantages like the work opportunity tax credit if they hire a veteran. They cannot depreciate their American-made irrigation equipment.”
Blumenauer said the discrepancies in the tax rates for marijuana-related businesses compared with other industries is why he introduced the Small Business Tax Equity Act. “Only Congress can fix this problem by updating the federal tax law that forces these businesses to close their doors, or drives them underground, encouraging evasion,” he said. “I welcome Americans for Tax Reform in endorsing this legislation, a commonsense fix with appeal across the political spectrum.”
In a letter to Rep. Dave Camp (R-Mich.), chairman of the committee on ways and means, Grover Norquist called the legislation “good tax policy” and said the legislation “should be co-sponsored by all members of Congress.” He continued:
Section 280E of the tax code denies ‘ordinary and necessary’ business expenses as a deduction against income derived from Schedule I substances. Unfortunately, tax law does not make any distinction between illegal street drug sales and state-established, legal cannabis dispensaries. These latter businesses comply fully with state law, pay all applicable taxes, and are vigorously-regulated.
There is no reason why the tax code should deny ordinary and necessary business expenses to legitimate businesses established under state law. The result is an arbitrary and punitive situation where legal employers face very high average effective tax rates that Congress never sought to impose on businesses.
The IRS has made it very clear that an act of Congress is required to fix this unintentional error. HR 2240 does just that by allowing legal cannabis dispensaries to deduct all ordinary and necessary business expenses.
In an interview with Mint Press News, Betty Aldworth, deputy director for the NCIA, said her organization did not introduce the legislation as a means to obtain special deductions for marijuana-related businesses, but did so because marijuana is the only legal industry that has been affected by 280E. Aldworth said the legislation asks the opposite of special treatment. “We would like to be taxed just like any other small business,” she said.
According to a press release from the NCIA, there were two different ways for Congress to change the tax rate for marijuana business: altering the tax code or removing marijuana from its current classification under the Controlled Substances Act as a Schedule I drug.
Aldworth explained that while the NCIA disagrees with marijuana’s current scheduling, she said she doesn’t think that many members of Congress have an appetite to discuss reclassifying marijuana right now, even as Americans increasingly do. “Change tax code to allow regulated businesses to be taxed fairly is an idea most people can agree with,” she said, adding that it just happens that these business are related to marijuana.
The Small Business Tax Equity Act is currently in committee; Aldworth said she hopes the members of Congress from the 20 states “whose constituents are currently being punished unfairly through this quirk in the tax law” will realize the sense of urgency in passing the legislation and pledge their support for the bill’s passage.
Banking issue still not resolved
While the Small Business Tax Equity Act addresses the inconsistencies in tax rates for legal marijuana businesses compared with other legal businesses, the legislation does not address the other financial issue affecting the industry: banking. Because marijuana is illegal federally, federally insured banks are prohibited from knowingly handling marijuana money.
Earlier this week the Justice Department announced it was reviewing policies on banking restrictions for marijuana companies. During testimony this week, Deputy Attorney General James Cole expressed concern about the high volume of cash in marijuana shops since many are forced to operate on a cash-only basis.
Talking to Business Insider, Aldworth said that because of the banking ban, many marijuana businesses are not able to accept credit cards or checks and as a result become high-profile targets for robbers.
“Regulators want us to start bank accounts as much as we want to have bank accounts,” said Aldworth. “It’s hard to do the accounting and the audits. It’s much more difficult than need be.” She added that those in the industry are not asking for business loans, but just a simple checking account.
Kayvan Khalatbari is an owner of Denver Relief, a medical marijuana dispensary in Colorado. He said his company lost its bank account after four years. “They sent us a letter and told us we had thirty days to get the hell out, even though I have accounts with Denver Relief, Denver Relief Consulting, both my pizzerias, my investment company and my property company and my personal accounts,” he explained. “As a result they’re probably going to lose around five to six million dollars in revenue a year.”
But it’s not just those who directly sell marijuana that have a hard time finding banks to work with. Dan Williams is the owner of Canna Security America, a security firm that helps Colorado marijuana businesses but doesn’t grow, sell or otherwise touch pot. He said his banker “kept seeing the obscene amount of money we were transacting,” and offered Williams a $50,000 to $100,000 bridge loan, a line of credit for equipment and other business needs.
“We were about to move into the offices, hiring people,” Williams said. “We had everything — every criteria for that line of credit perfectly: personal credit, three years of books showing profitability, every criteria they’ve asked for we met and exceeded.”
“We handed them this package and we get this phone call that says, ‘Unfortunately we decided not to give it you.'” he said. “In so many words, it was because, you know, we’re associated with the cannabis industry itself.”