June 25, 2019

HB 13-1042: Providing a State Income Tax Deduction to Marijuana Businesses That Are Precluded from Claiming a Federal Deduction

On January 9, 2013, Rep. Daniel Kagan and Sen. Lucia Guzman introduced HB 13-1047 – Concerning a State Income Tax Deduction for a Taxpayer Who is Prohibited from Claiming a Federal Income Tax Deduction by Section 280e of the Internal Revenue Code Because Marijuana is a Controlled Substance under Federal Law. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The starting point for determining state income tax liability is federal taxable income. This number is adjusted for additions and subtractions (deductions) that are used to determine Colorado taxable income, which amount is multiplied by the state’s 4.63 percent income tax rate.

Section 280E of the internal revenue code (section 280E) prohibits a trade or business that is illegally trafficking controlled substances from claiming any federal income tax deductions. This increases federal taxable income and, consequently, state income tax liability.

The bill allows a taxpayer who is licensed under the “Colorado Medical Marijuana Code” or under regulations promulgated by the department of revenue pursuant to amendment 64 to claim a state income tax deduction for an expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed by section 280E because marijuana is a controlled substance under federal law. Taxpayers eligible for this deduction include medical marijuana centers, optional premises cultivation operations, medical marijuana-infused product manufacturers, marijuana cultivation facilities, marijuana testing facilities, marijuana product manufacturing facilities, and retail marijuana stores. On Feb. 6, the Finance Committee amended the bill and sent it to the Appropriations Committee for consideration of the fiscal impact on the state.