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What Is the Small Business Tax Equity Act?

Aug 31 2017, by Jessica McElfresh in Legal Blog, Marijuana Business, Medical Marijuana

While numerous states are legalizing or decriminalizing medical and recreational marijuana, the federal government is maintaining its stance that cannabis is a Schedule I drug. This makes it illegal to grow, possess, use, or sell to others because the government has characterized marijuana as a drug with a high potential for abuse and dependence and with little-to-no medicinal value – despite what modern science says. This federal stance impacts more than criminal law. It also affects the tax code. Historically, businesses in states with medical or recreational marijuana are not entitled to certain tax benefits like other operations. However, the Small Business Tax Equity Act, which has been introduced in both the California Senate and House, could change that.

If you have a marijuana business in California or are interested in becoming involved in California’s cannabis industry, you need an experienced medical marijuana attorney like Jessica McElfresh by your side. The federal, state and local laws surrounding medical and recreational cannabis businesses are complex. At McElfresh Law, we will help you navigate these regulations and set your business up for success. Call us today at (858) 756-7107.

The Small Business Tax Equity Act

S. 777 and H.R. 1810 were introduced into the Senate and House, respectively, on March 30, 2017. They are both titled the Small Business Tax Equity Act of 2017, and, if passed, would alter how lawful marijuana businesses are treated by the Internal Revenue Code (IRC) in a way that is beneficial to business.

The Small Business Tax Equity Act would amend the IRC to exempt businesses that conduct lawful marijuana businesses under state law from the prohibition against allowing business-related tax credits or deductions for expenses related to the trafficking of controlled substances. Right now, if a business has anything to do with marijuana, it cannot enjoy a number of deductions and credits that help small businesses reduce costs and flourish. However, there are now many cannabis-related businesses that are legally operating within their states. The altered IRC would enable these businesses – the ones that are in full compliance with state and local law – to use these tax breaks.

Why Does it Matter?

If you are not familiar with the tax code, you may not be sure why this change matters so much. It matters because marijuana businesses are paying taxes on a greater amount of profit than other types of businesses.

For most businesses, their taxes are based on their gross income minus their expenses and other relevant tax deductions. The remaining income is what is taxed. However, marijuana businesses do not get to deduct their reasonable business expenses. This means the amount of profit that is taxed is greater than for other non-marijuana businesses. It might not seem like much, but the difference can be significant.

Where Are the Bills Now?

Currently, S. 777 is with the Senate Finance Committee and H.R. 1810 is with the House Committee on Ways and Means. It is likely that these bills could remain in committee for a great deal of time or die there. However, with the Republican Party indicating it is ready to move on from the health care debate and focus on tax reforms, the bill could move forward faster than expected.

How senators and representatives will react to a change in the tax code that would benefit marijuana business waits to be seen. Many lawmakers are beginning to favor legalizing some forms of marijuana or at least decriminalizing some aspects of the drug. However, other lawmakers remain strictly opposed to the drug and will not want to move forward with any reforms that will make it look like the federal government approves of the marijuana industry or is less likely to prosecute marijuana-related crimes.

Do You Have Marijuana Business Questions?

Medical and recreational marijuana businesses are heavily regulated in California. What you sell, how you package it, where your store is located, your marketing plan, and much more must all comply with state and local ordinances. Instead of trying to navigate this rocky and ever-evolving terrain by yourself, it is better to obtain the help of an attorney experienced within the California marijuana industry like those of McElfresh Law. We can help you from the very beginning, including with finding a lawful location, planning your security measures, figuring out how to bank, and helping you understand your tax obligations.

For answers to your questions about opening or conducting a marijuana business in California, contact McElfresh Law today at (858) 756-7107.

California marijuana laws change frequently. For updated information, see the following pages: Medicinal Uses of Marijuana and Recreational Marijuana Business