Federal Income Tax Rate for Marijuana Entrepreneurs Can Go as High as 75%

Entrepreneurs in the medical marijuana industry can be hit with a federal income tax rate as high as 75 percent, CNN reports. The high tax rate is due to a 1982 tax code provision aimed at drug runners.

The tax provision was enacted in reaction to a successful bid by a convicted drug trafficker to claim his yacht, weapons and bribes as business expenses, the article notes. The rule bars people selling illegal substances from deducting related expenses on their federal income taxes.

Because of the tax rule, people selling medical marijuana in the 18 states where it is legal cannot take standard business deductions such as rent or payroll.

Kayvan Khalatbari, co-owner of a medical marijuana center called Denver Relief, said his business sells just over $1 million in medical marijuana. Not being able to take some standard business deductions costs the business tens of thousands of dollars each year, he noted. He says his effective federal tax rate is about 50 percent.

Jim Marty, an accountant in Colorado who specializes in medicinal marijuana tax law, said many of his clients have effective tax bills of 65 percent to 75 percent, compared with the 15 percent to 30 percent that is typical for businesses.

In a letter to a congressman in 2011, the Internal Revenue Service said if Congress does not want medical marijuana sellers to be taxed according to the provision, it must change the law.