Pubdate: Sun, 10 May 2015
Source: Boston Globe (MA)
Copyright: 2015 Globe Newspaper Company
Author: Jack Healy, New York Times


Typical Write-Offs Denied by IRS

DENVER - Money was pouring into Bruce Nassau's five Colorado 
marijuana shops when his accountant called with the bad news: The 
2014 tax season was approaching, and Nassau could not rely on the 
galaxy of deductions that other businesses use to reduce their tax bills.

He owed the Internal Revenue Service a small fortune. "I had to write 
a check for $275,000," Nassau said. "Unbelievable."

The country's rapidly growing marijuana industry has a tax problem. 
Even as more states embrace legal marijuana, shops say they are being 
forced to pay crippling federal income taxes because of a decades-old 
law aimed at preventing drug dealers from claiming smuggling costs 
and couriers as business expenses on their returns.

Congress passed the law in 1982 after a convicted cocaine and 
methamphetamine dealer in Minneapolis went to tax court to argue that 
the money he spent on travel, phone calls, packaging, and even a 
small scale should be considered tax write-offs. The provision, still 
enforced by the IRS, bans all tax credits and deductions from "the 
illegal trafficking in drugs."

Marijuana business owners say it prevents them from deducting their 
rent, employee salaries, or utility bills, forcing them to pay taxes 
on a far larger amount of income than other businesses with the same 
earnings and costs. They also say the taxes, which apply to medical 
and recreational marijuana sellers alike, are stunting their hiring, 
or even threatening to drive them out of business.

The issue reveals a growing chasm between the 23 states, plus the 
District of Columbia, that allow medical or recreational marijuana 
and the federal bureaucracy, from national forests in Colorado where 
possession is a federal crime to federally regulated banks that turn 
away marijuana businesses, and the halls of the IRS.

The tax rule, an obscure provision known as 280E, catches many 
marijuana entrepreneurs by surprise, often in the form of an audit 
notice from the IRS. Some marijuana businesses in Colorado, 
California, and other marijuana-friendly states have taken the IRS to 
tax court.

The obscure tax rule catches many marijuana entre-preneurs by 
sur-prise, often in the form of an IRS audit notice.

This year, Allgreens, a marijuana shop in Colorado, successfully 
challenged an IRS policy that imposed about $30,000 in penalties for 
paying its payroll taxes in cash - common in an industry in which 
businesses cannot get bank accounts.

"We're talking about legal businesses, licensed businesses," said 
Rachel Gillette, the executive director of Colorado's chapter of the 
National Organization for the Reform of Marijuana Laws and the lawyer 
who represented Allgreens. "There's no reason that they should be 
taxed out of existence by the federal government."

A normal business, for example, might pay a 30 percent federal rate 
on its taxable income, which would represent its gross income minus 
deductible business expenses. A marijuana business, on the other 
hand, might pay the same federal rate on all of its gross income 
because it cannot take these deductions, taking 70 percent or more of 
its profits.

Colorado and a handful of other states have changed their tax laws to 
let legal marijuana businesses take deductions on their state returns.

And this month, Senator Ron Wyden and Representative Earl Blumenauer, 
both Democrats of Oregon, which legalized recreational marijuana last 
year, introduced legislation that would allow marijuana businesses 
that are following state laws to take regular deductions on their 
federal returns.
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MAP posted-by: Jay Bergstrom