NEW YORK (MainStreet) — Julianna Carella began incorporating cannabinoids into her diet and sharing the benefits with friends and family members who encouraged her to start a business.
In 2008, before marijuana was recreationally legalized in Colorado, Carella launched Auntie Dolores, an edibles company in California.
But because of the rules and regulations of IRS Tax Code 280E, Carella and other pot entrepreneurs face challenges in filing taxes that the rest of us don't.
“It unfairly eliminates the ability to write off many of the usual operational expenses incurred in traditional business,” Carella told MainStreet. “It's a challenge we deal with because of the nature of our industry but we’re hoping for an eventual tax code reform.”
Tax Day can be a nightmare for business owners who are ill-prepared but even more so for many marijuana entrepreneurs trying to navigate the murky gray area between state and federal tax law.
“It’s not any more difficult than any other industry but what is challenging is when a CEO finds him or herself in tax brackets of 70% to 80% or even higher," said Jim Marty, a CPA who has been preparing taxes for pot businesses since 2009. "The sales numbers are bigger this year now that recreational use was legalized.”
Another challenge that marijuana CEOs face is how to pay income taxes on sales.
“Cash is the only way they can pay,” Marty told MainStreet on April 15. “My clients are lining up at the IRS office. Even if I file an extension, they still owe taxes today.”
Marty’s clients arrived at 1999 N. Broadway in Denver with armored trucks containing cash and bags of money, because traditional banks won’t do business with the marijuana industry.
“We try to do what we can to minimize the effects of 280E but we don’t have a magic wand to make it go away,” Marty said. “The good news is that in Colorado there is no 280E. The governor passed tax legislation last year that allows all deductions on tax returns for marijuana businesses.”
For marijuana business located in states other than Colorado there are several obstacles 280E creates.
“Medical cannabis businesses are not able to deduct standard expenses like payroll, supplies and professional services,” said Derek Peterson, CEO and president of Terra Tech. “The net effect of this is effective tax rates of more than 50% in some situations.”
Peterson’s Terra Tech operates marijuana businesses in California and Nevada.
“We organize each business that is operating in each state as it's own subsidiary with its own tax return,” Peterson told MainStreet. “This is necessary due to the complexity local and state taxes place on filing our returns.”
Preparing multiple tax returns means an additional layer of professional and accounting costs.
“The end result is having to retain both accounting and legal counsel in each state and sometimes, in the case of California, in each city due to how differently taxes are handled from locality to locality,” Peterson said.
Overall, there is no tax overlap from state to state.
“There really is no interstate commerce in marijuana, because there’s no selling of marijuana across state lines," Marty said.
For example, Carella’s gourmet edibles and pet products are sold in more than 150 dispensaries throughout California, and the brand is spreading to additional states this year, but across state lines it’s every man for himself come tax time.
“Our parent company is a California corporation and we file federal and state returns in California,” said Carella. “Our operations in other states are through partnerships with entities who are licensed to produce and process cannabis in their state and those partners are responsible for their state and federal taxes.”
— Written for MainStreet by Juliette Fairley