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Standard Tax Deductions not Granted to Marijuana Businesses

Since the legalization of cannabis in states like Washington, Oregon, and Colorado; a slew of new businesses have opened, fueled by entrepreneurs eager to cash in on this lucrative new industry. Unfortunately for most of them, though, the vast majority of their profits will go straight to the IRS.

The problem lies with a small clause in our Federal tax code, which prevents any business engaged in the “trafficking” of schedule 1 narcotics from claiming standard tax deductions. Originally put into effect in 1982 during the Reagan Administration’s war on drugs, the clause was designed to prevent drug traffickers from deducting their couriers’ salaries as part of their business expenses.

Unfortunately, though, the result has been that legal cannabis entrepreneurs now find themselves unable to claim any of the standard tax deductions afforded other businesses; such as payroll, rent, and administrative costs. The resulting tax burden can be crippling, reducing profit margins to almost zero and causing many businesses to go under.

This April, Sen. Ron Wyden and Rep. Earl Blumenauer from Oregon introduced legislation in D.C. which would reform the tax code and thereby put legal cannabis operations on the same footing as other businesses, but there is little optimism that Congress will take any action until cannabis is taken off of the list of schedule 1 narcotics. Ben Franklin once said that the only things certain in life were death and taxes, but for the burgeoning legal cannabis industry, a more apt expression may be death by taxes.

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