Missouri lawmakers overwhelmingly passed legislation this year allowing licensed medical marijuana companies to deduct business expenses from their state tax returns (Photo by Uriel Sinai / Getty Images).
Missourians voted to legalize medical marijuana in 2018. However, under federal law, growing, transporting, or selling marijuana remains a crime.
Unsurprisingly, this dynamic has given the young industry a lot of headache.
One notable example: unlike any other legal company in the state, marijuana companies are prohibited from deducting business expenses from their taxes.
“As a small business owner, can you imagine not being able to deduct normal business expenses from your tax returns?” Senator Denny Hoskins, R-Warrensburg, said during a Senate hearing earlier this year. “If you couldn’t deduct these expenses, your taxes would go up significantly.”
Missouri lawmakers took a step during the recently completed legislature to alleviate some of that burden. While federal law remains unchanged, a bill allowing medical marijuana companies to deduct normal and necessary business expenses from their state tax returns was passed almost unanimously and sent to the governor.
The bill is now waiting for Governor Mike Parson to sign the veto.
For purposes of federal income tax, a section of the tax code prohibits deductions for expenses that arise during the operation of “a trade or business … that consists of the trade in controlled substances”.
Marijuana is a Schedule I controlled substance, and the IRS uses this provision to prohibit cannabis companies from deducting business expenses.
The legislature-approved bill only allows medical marijuana companies licensed under the Missouri Constitution to apply for an income tax deduction equal to what would otherwise be eligible for federal income tax deduction.
With this change, the legislature can “Bringing medical cannabis companies on par with all other small businesses across the state in terms of taxes, ”said Andrew Mullins, executive director of the Missouri Medical Cannabis Trade Association.
David Smith, a St. Louis County accountant who works with numerous medical marijuana companies, said applicable law could mean an effective corporate tax rate of 70 percent or more.
“Some companies may even be subject to income taxes if they operate at a loss,” Smith told lawmakers.
That’s because companies pay taxes on gross profits rather than gross income without the deductions, Ncholas Rinella, CEO of Hippos Cannabis, told a Senate hearing earlier this year.
“The expenses could outweigh your income, especially when you’re starting out,” he said.
This taxation “limits the industry’s ability to care for patients, create jobs and reinvest in the communities in which we operate,” said Rinella. “We are not looking for special treatment, we just want to be treated like any other legal transaction.”