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Kiplinger Tax Letter: Is State Tax Relief for Marijuana Businesses Coming?

The marijuana industry is hoping for some help from President Biden’s administration. (Photo: Poison Tax)

Marijuana businesses face a heavy federal income tax burden, as they cannot write off most business expenses under Section 280E.

Despite being legal for recreational and medical use in 23 states and the District of Columbia, they cannot claim business expenses on their federal tax returns. (Photo: State Treasurer)

According to Kiplinger, despite being legal for recreational and medical use in 23 states and the District of Columbia, they cannot claim business expenses on their federal tax returns.

The IRS places a high priority on enforcement against legal marijuana businesses. Agents target marijuana dispensaries that claim expenses as deductions, and courts frequently rule in favor of the IRS on this issue.

Cannabis industry lobbyists have urged Congress to either legalize marijuana for federal use or to allow marijuana businesses located in states where the drug is legal to deduct their expenses from federal taxes. They have made no progress thus far, and their chances of receiving assistance from Congress over the coming years are slim.

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The marijuana industry is looking to President Biden’s administration for assistance for state tax relief. Drugs are divided into five schedules under the Controlled Substances Act based on their potential for abuse or dependence as well as their potential for medical use.

Also stated in the article from flipboard, marijuana is currently classified as a Schedule 1 drug, the most severe level. The president requested a review last year to determine whether marijuana should be moved to a lower schedule or removed entirely. The main impact on federal income taxes is as follows.

Businesses that traffic in illegal Schedule 1 or Schedule 2 drugs are actually prohibited from deducting business expenses on their federal income tax returns by Section 280E. Legal marijuana businesses won’t receive federal state tax relief if marijuana is reclassified as a Schedule 2 drug. Legal marijuana sellers could deduct business expenses if it is downgraded to a Schedule 3, 4, or 5 drug or removed from the list.

State tax relief for marijuana businesses

States are implementing state tax relief for legal marijuana firms, decoupling from federal tax code Section 280E, allowing deductions for state tax purposes.

There are laws like this in place in about 13 states, including California, Colorado, Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York, and Oregon. Expect additional states to follow suit.

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