Financial Planning Tough For Pot Shops

640px-Medical-marijuana-signWhile the drama between mobster Al Capone and G-Man Elliot Ness have made for great television and movie drama over the years, it was garden-variety tax evasion convictions that put Capone behind bars.

The relationship between the IRS and illegal activities has a long and glorious history and a new chapter is being played out right now atop the nation’s patchwork quilt of marijuana legalization laws.

Conflicting pot laws.

Although several states have legalized marijuana for medical or recreational use – It’s an interesting use of the word “recreational” isn’t it? – it remains a federally controlled substance. Uncle Sam doesn’t recognize those locally legal usages as, well, legal.

However, that doesn’t, as Al Capone discovered, exempt marijuana sellers from paying income tax. They still must pony up their taxes, but they face one huge legal roadblock which is causing the business dreams of some marijuana sellers to go up in smoke.

Section 280E of the IRS Tax Code prohibits marijuana dealers from deducting “normal and regular” business expenses when they file their taxes. The only expense they are allowed to deduct is the cost of the marijuana they sell. This raises their effective tax rate significantly when compared to the average non-pot-selling business.

That has created a push for a change in the law as well as some creative accounting practices. Some sellers are diversifying their businesses in an effort to create legal entities where they can write off some of these expenses. Also, the black market remains strong, even in areas where marijuana is legal. Surprise! Some folks prefer to skirt taxes entirely.

Uncle Sam will take the money

Note however, that despite all the fuss, the IRS is still quite happy to accept what it has defined as illegal drug money. The law isn’t quite so tolerant with banks.

“Since all banks are subject to federal law, they’re unable to offer any banking services to marijuana business,” Rob Rowe, vice president and senior counsel of the American Bankers Association, recently told Fox Business.

“That means marijuana services don’t have access to checking or savings accounts, loans or any type of card services. The only payment mechanism left without access to the banking system is cash – plain and simple,” Rowe explained. This has led to pot shops installing ATMs. Further, sellers are using personal accounts, holding companies and other “creative” means to deposit their cash in banks.

Movement in Washington

The House of Representatives recently passed a measure that would prevent federal authorities from spending any money to go after banks that serve pot shops. The Senate has not yet considered the bill.

Also, President Obama issued notice that federal authorities wouldn’t pursue banks that did business with marijuana sellers, if they follow certain rules. Just a day or two ago, a Nevada marijuana dispensary, GrowBLOX, was able to open an account with the First Security Bank of Nevada. Is it an isolated case that might get walked back or is the dam beginning to spout leaks? We just have to wait and see.

One final note: Colorado, which was expecting a big influx of tax revenue from pot sales, is pretty disappointed so far. Analysts predicted $2 million a month; it took four months to hit that mark.

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Image: “Medical-marijuana-sign.” by Laurie Avocado. Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons.