The deadline to file income taxes is April 15. For many businesses, deductions on things like labor and rent help to keep tax bills low. But that's not the case for marijuana dispensaries in states that have legalized medical or recreational use.
It's frustrating for business owners like Erica Freeman, who runs Choice Organics near Fort Collins, Colo. She's marking a big milestone this month. After voters legalized recreational pot in the state, Freeman spent thousands opening a new shop right next to her medical dispensary.
"...a whole separate video surveillance and security systems—and all of those kinds of things," she says.
Freeman and many other licensed marijuana business owners file taxes. But because of an Internal Revenue Service code known as 280E—originally written for illegal drug traffickers—they can't write off retail expenses associated with the business.
"I mean, all of these things are necessary for the front of the house, and therefore it's really not eligible to be written off," she says.
Recent rulings from tax court have allowed businesses to write off costs associated with growing marijuana. But the income tax rate for pot shops in Colorado can be as high as 70 percent. That's according to Jim Marty, a tax accountant who works with dozens of dispensaries across the state.
"Depending on where they're at it can be catastrophic," says Marty, who adds that the situation is particularly onerous for dispensaries just starting out.
"If they have losses—real, cash-basis losses—it can be a shock to them to find out that they owe taxes in years when they haven't made any money."
In California, 280E is even a problem for nonprofit dispensaries. Aaron Smith with the National Cannabis Industry Association says stores that sell medical marijuana can't get tax-exempt status from the IRS. That means they're filing taxes as for-profit businesses.
"The cruel irony behind this is that illegal drug dealers almost never even file income taxes," he says. "So this provision really only affects the legitimate state-licensed marijuana providers."
The Association recently hired a full-time lobbyist to push reform in Congress. In Colorado, a solution could come from the courts. Arguments on one dispensary's tax case are expected to be heard later this year.