Legal Weed Businesses are Worried the IRS Could Tax Them Out of Existence

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When California voted to legalize recreational marijuana use in November, few people were as thrilled as Steve DeAngelo. Sporting his signature porkpie hat and braided hair while seated in the massive grow operation he’s building south of San Francisco, the longtime activist and weed industry entrepreneur called legalization “the culmination of my life’s work.”

DeAngelo has many reasons to celebrate, not least being that he has positioned himself to capitalize on what is projected to be a $7.6 billion market for legal cannabis in California within the next four years. But the founder of Oakland’s Harborside, which claims to be the country’s largest medical marijuana dispensary, isn’t banking those billions just yet.

“The IRS,” he said, “is still trying to tax us out of existence.”

Marijuana is now legal for recreational use by adults in nine states and Washington, D.C., and approved for medical purposes in 29 others. It remains illegal on the federal level, however, and the U.S. tax code — specificallySection 280E — treats state-sanctioned pot businesses like illicit drug trafficking organizations.

The rules prohibit weed merchants from taking deductions for common expenses like rent, insurance, and electricity, which means they end up paying far more than the standard 35 percent corporate rate. These businesses can be taxed anywhere from 40 to 90 percent depending on how they operate. The IRS can also tack on stiff penalties when companies fail to comply.

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