On Tuesday, Colorado and Washington took the historic step of being the first states to legalize the recreational use of marijuana.
Soon, budding entrepreneurs in these states (commonly referred to as ‘ganjapreneurs’) will be able to open up marijuana dispensaries for public consumption, all in accordance with state law.
Obviously, marijuana possession remains illegal under federal law, which can pose certain logistical challenges for dispensary owners.
Robert Wood, Forbes contributor and partner at Wood LLP, notes that these legal dispensaries are unable to operate as legitimate businesses, and instead labeled as drug traffickers.
The profitability of dispensaries is just as much a threat to their existence as an owner's risk of prosecution.
The disincentives to running a marijuana dispensary have been baked into the tax code. Section 280E of the U.S. tax code, added in the 1980s, prevents dispensary owners from making business deductions from their gross income:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
The inability to deduct business expenses cripples a dispensary’s ability to turn a profit. However, a loophole exists. If a dispensary operates a separate business in addition to the sale of marijuana on its premises (massages, counseling, etc.) it can deduct expenses relating to those operations. Oftentimes, this allows dispensary owners to deduct a majority of their rent expenses. The sale of paraphernalia, by the way, does not count as a distinctly separate business.
Until the tax code or the list of federally controlled substances changes, marijuana dispensary owners in Colorado, Washington, and the 16 states that allow medicinal marijuana will have to continue to jump through hoops in order to have a viable business model.
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