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Medical marijuana dispensaries are denied federal tax breaks

Despite being small businesses, medical marijuana dispensaries—of which there are about 2,500 in the country—have to pay full taxes to state, local and federal government according to USA Today on March 17. Other small businesses are given federal tax breaks to help support businesses that are facing the competition of chains.

Budtender Cody Blake handles marijuana at Perennial Holistic Wellness Center, a not-for-profit medical marijuana dispensary in operation since 2006, on September 7, 2012 in Los Angeles, California.
Photo by David McNew/Getty Images
 Jars full of medical marijuana are seen at Sunset Junction medical marijuana dispensary on May 11, 2010 in Los Angeles, California.
Kevork Djansezian/Getty Images

So what’s holding dispensaries back from receiving these breaks? That would be a tax code that was first enacted in 1982. That’s right. A tax code that was created before marijuana was ever legalized is now penalizing what has proven to be a profitable industry, at least in Colorado, before taxes.

The code, called 280E, was designed to prevent businesses from writing off illegal drug activity on their taxes. However, now that 20 states have legalized medical marijuana, it might be time to adjust that code.

However, the Internal Revenue Service is applying the tax code to the legal pot shops in each state. The IRS says it is following the law by not allowing the dispensaries to make these deductions.

In order for any changes to be made to code 280E, members of Congress would need to change the Internal Revenue Code or the Controlled Substances Act.

With 280E in play, the tax rate for many businesses that sell marijuana is 50 percent, or more. The deputy director of the National Cannabis Industry Association told USA Today, “These are small businesses that are part of the local economy, but because of this tax burden, it makes it dramatically more difficult to invest in their people and in their property."

According to USA Today’s report, many of the dispensaries will end up settling, but one company called Canna Care in Sacramento is fighting. The IRS claims that the business owes $875,000 in back taxes. Though the IRS offered a settlement deal of $100,000 the couple who owns the business declined to take the deal ‘on principle.’ They believe tax code 280E should not apply to their business.

Without being able to write off things like rent, payroll and expenses for running a business, small business have very little chance of making a profit. USA Today reports that medical marijuana dispensaries are able to write off the cost of the marijuana itself or the sale and service of things not actually related to marijuana, like shirts or yoga.

Marijuana is still classified as a Schedule 1 Drug by the Controlled Substances Act, which makes marijuana classified as one of the most dangerous drugs.

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