Why Marijuana Companies Struggle to Make a Profit

With 29 states (plus the District of Columbia) that have legalized marijuana in some form, the U.S. is seeing an explosion of pot-related companies. In 2016, there were between 21,000 and 33,000 cannabis businesses in the U.S. Yet many of these businesses have a hard time just making ends meet, let alone making a profit. That's because marijuana companies operate under a tax handicap that most other businesses don't.

Section 280E was introduced to the tax code in 1982, during the hottest part of the war on drugs. Congress had discovered a tax court case in which a drug trafficker was allowed to deduct a number of expenses for his various illegal businesses. Legislators were so offended by this case that they passed Section 280E, a provision ruling that illegal businesses cannot deduct any business expenses other than cost of goods sold (meaning expenses related directly to creating the business' product).

Why is this a problem for marijuana companies? Because technically, pot is still a federally banned Class I controlled substance. And that means marijuana dispensaries are subject to Section 280E, resulting in enormously higher taxes for these businesses.

Source: Fool.com