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This is Part 3 of our three-part series covering the Internal Revenue Code Section 280E. If you haven’t already, you may want to read parts one and two before moving forward.

Previously, we learned that Section 280E was originally designed to prevent illegal drug traffickers from claiming business deductions. However, with the state-legal cannabis businesses now operating in many states across the U.S., Section 280E is creating a lot of problems for the industry.

Here, we discuss 280E’s wide-reaching impact on state economies.

Section 280E is Reducing Tax Revenues

State-legal cannabis businesses want to pay federal and state taxes. However, the high tax rates (up to 70% of the business’s income, in some cases) has made some businesses ignore 280E on their tax filings or avoid paying taxes altogether. Many cannabis industry businesses want reform before they pay taxes. While they wait for these changes, Section 280E is effectively reducing the tax revenues for both states and the federal government.

In addition, the risk of being targeted by the IRS has led some state-legal cannabis businesses to hoard cash rather than reinvesting it in their communities and their businesses. The risks that Section 280E has created for legal businesses means that these businesses will continue to be less profitable, making their long-term survival unlikely.

How Can This Problem Be Resolved?

The National Cannabis Industry Association has suggested that the best fix for the problem would be to remove marijuana from the list of substances included in the Controlled Substances Act. Most members of the industry agree, though progress on that front has been bleak.

In addition, The Small Business Tax Equity Act of 2015 — companion Senate and House legislation introduced in the 114th Congress by Sen. Ron Wyden (D-OR) and Rep. Earl Blumenauer (D-OR) — is a proposal that would exempt state-legal cannabis businesses from Section 280E as long as the business remains in compliance with state law.

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