The marijuana industry’s battle against the IRS – by Tom Huddleston, Jr. APRIL 15, 2015, 5:00 PM EDT

Legalized marijuana sales are spreading across the U.S., but the industry’s businesses are facing steep federal tax bills thanks to a wrinkle in the tax code dating back to the 1980’s.

Millions of Americans rushed to finish their taxes in the hours just before the midnight deadline Wednesday. But for business-owners in the cannabis industry, a years-long tax battle is far from over.

Supporters of legal marijuana cited tax revenue as big factor in pushing through laws that have allowed medical marijuana sales in 23 states and recreational pot in four. But the businesses that grow and sell marijuana in those states are also staring at a steep federal tax bill, especially when compared with businesses in other industries.

That’s because of a little-known wrinkle in U.S. tax law that has turned out to be a major problem for pot businesses, even when operating where sales of medical or recreational marijuana are legal under state law. In 1982, Congress enacted Section 280E of the federal Tax Code to prevent drug traffickers from being able to claim business expenses related to illicit dealings on their federal tax returns. (Seriously, lawmakers decided to close the loophole after a drug dealer successfully wrote off travel expenses as well as the cost of a scale for weighing drugs.)

Of course, 280E predates the recent wave of marijuana legalization on a state-level by a couple of decades, but the federal laws outlawing marijuana remain in effect. That leaves marijuana cultivators and dispensary owners across the country in a tricky situation in which they may be operating legally under the laws of their respective states while the federal government — including the Internal Revenue Service — still technically consider them outlaws.

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