The DOJ's announcement that it does not plan to prosecute individuals and businesses in states that have legalized marijuana has many in Washington breathing a sigh of relief. Unfortunately, the federal response does little to change the IRS's opinion of the pot industry. While there has been no IRS announcement regarding the legalized marijuana industry, there is no indication that they plan to lay off the tax attack they have levied against marijuana income.
Some say that the federal tax situation is perhaps the biggest threat to the legalized marijuana business and could force the entire industry underground. Businesses that are not allowed to take tax deductions are caught paying hefty taxes and subject to IRS audits and scrutiny. Yet if the federal government wants to prevent an underground or black market from emerging, they need to treat legalized marijuana as a business—in every sense, including taxes.
If the IRS allowed marijuana businesses and growers to operate as legal businesses, then those owners would be allowed to deduct business expenses, such as rent, salaries, and other expenses. As it stands now, they are not allowed these important deductions, but are still taxed on the income they receive
There are currently a few ways around the IRS taxes; however, none of them are ideal and create headaches and potholes for newly emerging marijuana businesses. Some have chosen to run other businesses and sell marijuana on the side, other have toyed with operating as a nonprofit social organization or a cooperative. Unfortunately, unless the laws change quickly, it seems that the IRS could doom an entire industry before it even begins.