IRS Stunting the Green Rush With Crippling Tax Rates

Every business owner knows taxes hurt net profit margins and cash flow. No matter what the tax rate, it’s easy math to see that every dollar you pay Uncle Sam means less cash to pay your employees or reinvest in your business.

However, for businesses who deal directly with cannabis, the pain felt by the tax bill due the IRS is especially damaging.

The IRS targets cannabusinesses with Section 280E of the tax code which stipulates that business expenses cannot be deducted for those involved in selling certain drugs. The provision originally aimed at drug traffickers is now being used to cripple state-authorized distribution centers.

Many such companies end up owing 70 percent or more of their net income in taxes. 70 percent! According to Steve Fox of the National Cannabis Industry Association, that is double the tax burden for normal companies which can deduct expenses.

Let’s look at one example from this article by MMJ Business Daily. In 1997 Lynette Shaw opened the first licensed medical marijuana center in America. Her dispensary closed in 2011 after prosecutors filed charges against her landlord. In 2012 she filed for bankruptcy after receiving a $1.27 million dollar bill from the IRS. Although she claims to have lost $186,826 during 2008-9, the IRS claims her taxable income was $2.83 million during that time. Ouch. That’s quite the difference.

Sadly, Lynette Shaw’s story is not terribly unique. Taxes (and taking away credit card payments) are a powerful weapon in the federal arsenal against cannabusinesses and the industry as a whole. Companies are struggling to stay afloat, let alone invest in the growth or research and design needed to fuel the green rush. Steve Fox said, “I’ve seen estimates that the 280E tax burden for Colorado alone may be around $20 million. So the federal government is taking $20 million out of hands of Colorado business owners and the Colorado economy.”