©Eldad Carin/ISTOCK/THINKSTOCK
One constant most businesses can count on is the ability to write off standard business expenses. For many companies, the ability to deduct expenses from gross profits can be the difference between profitability and operating in the red.
However, marijuana businesses operating in compliance with state laws are not able to take advantage of this basic tenet of corporate financial management due to a provision of the tax code originally intended to target illegal drug traffickers.
In the early 1980s, the IRS enacted Section 280E of the Internal Revenue Code to prohibit businesses involved in drug trafficking from deducting normal business expenses from their net income. This action was in response to a Tax Court decision that U.S. tax law did not prevent drug dealers from deducting business expenses.
More than 30 years later, as public acceptance has grown and 23 states and the District of Columbia have legalized medical and recreational usage of marijuana, legitimate marijuana businesses have sprung up around the country to meet the growing legal demand. Although operating in accordance with state law, these businesses have been prohibited by the IRS from deducting normal business expenses under Section 280E and many have been faced with costly tax audits.
Unable to deduct normal business expenses, marijuana dispensaries have been hit with excessive tax bills, often paying 50 to 70 percent of their net income in federal taxes, according to the National Cannabis Industry Association (NCIA), an industry trade group. This onerous tax burden has prevented these companies from adding jobs, investing profits back into their businesses, and in some cases, has forced companies to cease operations.
Cannabis companies have called on Congress to intervene, and legislation has been introduced in the House and Senate that would add language to Section 280E to exempt its application to businesses that conduct their marijuana businesses in compliance with state law. The bills have been forwarded to the appropriate committees in each chamber for further consideration.
Working around Section 280E is just one of the unique challenges senior financial executives in the cannabis industry must deal with. Managing an organization’s financial operations in a fast-moving environment such as Colorado’s cannabis marketplace provides important lessons for CFOs in all industries.
Senior financial professionals from Colorado’s marijuana industry will discuss these challenges and provide valuable insight into how to adapt when your market is turned upside down by a new and rapidly growing economic force during a panel presentation at FEI’s Financial Leadership Summit Conference at the Broadmoor in Colorado Springs on May 22-24. The conference will provide relevant educational content on current issues of interest to senior financial executives along with valuable networking opportunities. Please click here to learn more about the conference program.