What would the Small Business Tax Equity Act do?
This commonsense legislation, The Small Business Tax Equity Act of 2013, creates an exception to Internal Revenue Code Section 280E that allows businesses operating in compliance with state laws to take business-related deductions associated with the sale of marijuana just like any other legal business.
Why is this legislation needed? What is section 280E and what does it do?
Currently, Section 280E the federal tax code prohibits anyone trafficking in Schedule I or Schedule II substances from deducting their business expenses from their taxes or taking any other business credits or deductions related to that business. Trafficking means the buying or selling of drugs covered by Schedule I or II, so a marijuana dispensary would be covered by Section 280E, while a pipe shop would not.
When was this introduced into the tax code and why?
Congress added this prohibition in 1982 after a drug dealer claimed his yacht and weapon purchases as legitimate business expenses. The law successfully ended those behaviors, but now that state laws are changing, it also limits legal and reasonable economic activity now allowed under many state’s laws.
How does 280E impact marijuana businesses?
Marijuana is a Schedule I substance under federal law and therefore even businesses operating in compliance with state law are not allowed to deduct the ordinary expenses of running a small business like rent, utilities, and payroll. They cannot claim the Work Opportunity Tax Credit if they hire a veteran; they cannot depreciate their American made irrigation equipment; and they cannot take any credit or deduction relating to construction or operation costs if they want to revitalize a building for their operations.
Why is the fact that marijuana businesses can’t deduct their expenses a problem?
Because marijuana businesses are not allowed to deduct their expenses, this means that marijuana businesses often pay federal income tax rates in the 65–75% range compared to 15-30% for other businesses. They are taxed on their gross revenues, unlike all regular businesses, which pay tax only on income after their expenses.
These businesses have no complaints about paying their fair share of taxes, but not being able to deduct expenses creates a disproportionate burden that can put small dispensaries out of business, and will prevent many small business people from entering the industry in the first place, forcing the industry underground.
Barring marijuana small businesses from operating like normal businesses incentivizes criminal activity and tax evasion.
What businesses are would be impacted by this legislation?
Any business involved in the dispensing of marijuana, whether medical or recreational. 19 states have passed laws allowing for the legal use of medical marijuana and there are an estimated one million legal medical marijuana patients across the country. In many states, medical marijuana is sold through dispensaries. These dispensaries provide safe, legal facilities for patients who have been authorized by a physician. These dispensaries are also subject to Section 280E.
Washington and Colorado voters passed measures allowing for the legal recreational use of marijuana. Businesses in these states -- from the production to retail side of the industry -- will soon be opening in full compliance with state law. These businesses will also be subject to Section 280E.
What does this mean for Oregon?
Oregon is likely to soon pass a measure allowing for the expanded legal uses of marijuana, similar to Washington and Colorado. We want to make sure that our businesses are able to operate like normal businesses, and that law-abiding people enter into the industry when that happens.