Medical Marijuana Dispensaries Can’t Deduct Business Expenses on Colorado State Tax Returns

Marijuana, even of the medical variety, remains illegal at the federal level — meaning that dispensary owners can’t take business deductions on tax returns they submit to the feds. But since MMJ is legal in Colorado, shouldn’t they be able to deduct legitimate business expenses on state forms? Mitch Woolhiser, co-owner of Northern Lights Natural Rx, thought so. But he was wrong.

Why are such deductions disallowed? It’s complicated….

When Woolhiser and his wife filled out their state returns in 2010, they took business deductions for Northern Lights, and their submission sailed through without an apparent problem. So they did likewise for 2011, only to receive an unfriendly letter from the Colorado Department of Revenue — a missive officially known as a notice of deficiency or rejection of refund.

“It’s basically a statement regarding my individual tax return,” Woolhiser says. “Because we’re an LLC, it’s on our individual taxes. They adjusted my return to reflect the actual gross adjusted income from my 1040 rather than what my accountant entered.” As a result, his modest, $877 refund was transformed into a bill to the State of Colorado for well over $3,000.

To add insult to injury, the state reexamined his 2010 return and kicked back that form as well. Because Northern Lights was just getting started back then and wasn’t making much if any profit, the amount he now owes for that year is much smaller: under $200. But combined with the 2011 amount and the $17,000 he had to pay to the federal government, the sum came to around $20,000 — which just happened to be almost exactly the amount of net profit the MMC generated as measured by standard accounting practices.

“They took all the money we made,” Woolhiser says. “It was a 100 percent tax rate.”

This turn of events wasn’t totally unexpected. “My accountant is an expert, and she warned me this might happen — but I didn’t believe it,” Woolhiser concedes.

– Read the entire article at Denver Westword.

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