Medical Marijuana shop profits go to pot, thanks to the IRS
Federal law makes marijuana illegal. Even in the 18 or so states that have legalized medical marijuana. There is a provision in the federal tax code that is hitting the owners of medical marijuana shops where it hurts most; in the wallet, because their product violates federal drug laws. Let's picture two businesses next to one another.
Bob's Bicycles and Mike's Marijuana Market are in the side-by-side office spaces in a building on Main Street. They pay the owner of the building the same amount of rent each month to lease the space. Their utility bills are about the same. They have similar expenses for advertising, telephone, internet, in fact for everything.
In calculating the taxable income for a sole-proprietorship, you take gross revenues, subtract the cost of the goods sold and you get a number. Then from that number you subtract your deductible expenses and the result is the net profit. That's what is subject to self-employment tax and to income tax.
Let's pretend that after subtracting the cost of goods sold, both Bob and Mike had $150,000 of revenues before expenses. Their expenses are about the same, $100,000. So they should each have a net profit of $50,000, subject to self-employment tax and income tax. Seems fair so far, right?
Wrong. Because of a 1982 change to the tax code, after a convicted drug dealer successfully claimed his yacht, weapons and bribes as business expenses; now anyone selling illegal substances is barred from claiming their related expenses on their income tax returns.
So Bob will be taxed on his income after expenses. Mike will be taxed on his income without being able to deduct expenses. Because of the way self-employment tax is calculated, Mike isn't paying double what Bob pays, but he pays more. A lot more.
All because pot is illegal under federal law and a law designed to catch big-time drug dealers is making medical marijuana businesses in states where their business is legal, is making them pay more than "their fair share" of income tax.
Is that fair?
Bob's Bicycles and Mike's Marijuana Market are in the side-by-side office spaces in a building on Main Street. They pay the owner of the building the same amount of rent each month to lease the space. Their utility bills are about the same. They have similar expenses for advertising, telephone, internet, in fact for everything.
In calculating the taxable income for a sole-proprietorship, you take gross revenues, subtract the cost of the goods sold and you get a number. Then from that number you subtract your deductible expenses and the result is the net profit. That's what is subject to self-employment tax and to income tax.
Let's pretend that after subtracting the cost of goods sold, both Bob and Mike had $150,000 of revenues before expenses. Their expenses are about the same, $100,000. So they should each have a net profit of $50,000, subject to self-employment tax and income tax. Seems fair so far, right?
Wrong. Because of a 1982 change to the tax code, after a convicted drug dealer successfully claimed his yacht, weapons and bribes as business expenses; now anyone selling illegal substances is barred from claiming their related expenses on their income tax returns.
So Bob will be taxed on his income after expenses. Mike will be taxed on his income without being able to deduct expenses. Because of the way self-employment tax is calculated, Mike isn't paying double what Bob pays, but he pays more. A lot more.
All because pot is illegal under federal law and a law designed to catch big-time drug dealers is making medical marijuana businesses in states where their business is legal, is making them pay more than "their fair share" of income tax.
Is that fair?
posted by me at 11:53 AM
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