Here's a bit of tax trivia you probably don't know: The IRS does not differentiate between income derived from a legal business and income derived from an illegal business. In the eyes of the government, everyone needs to pay their fair share of income taxes.

This has huge implications for the booming marijuana business--even in states where it's legal.

Back in 1982, Congress enacted tax code 280e to ensure drug traffickers weren't getting the same benefits as upstanding businesses and deducting their yachts, fast cars, telephone bills, rent, and employees' salaries. As it stands today, the code applies to any business that sells or resells controlled substances, including cannabis, which are "prohibited by Federal law or the law of any State in which such trade or business is conducted."

When the tax code is unpacked, it means marijuana producers and processors are able to deduct the cost of goods sold, but dispensaries and retail shops cannot deduct any business expenses such as rent, advertising, labor costs, and more.

Over the past two decades, as the legal cannabis industry has matured and as a handful of states have legalized the drug under state law, 280e has been called into question. Inc. caught up with a few certified public accountants who have been filing returns for the nascent industry to find out more.

The 100 Percenters

Jim Marty, a CPA in Denver who has over 250 cannabis clients, says the tax burden depends on how the company is structured. Infused products and edibles companies, which are manufacturers, are able to deduct all of their costs. Colorado state law mandates that growers must also have a retail shop attached to the business. In that kind of a structure, entrepreneurs can deduct costs associated with growing the plant, but nothing related to the retail business.

"People who have multiple retail locations with millions of dollars in retail expenses run into trouble because the IRS doesn't allow you to take deductions for retail. I have filed for a few clients who made $2 million before taxes, yet their tax bill is $3 million," Marty says. "I have two audits on my desk right now where the tax rates are both over 100 percent. The IRS has no problem with this, they believe they are just enforcing the Internal Revenue code."

If you want to keep your tax rate below 100 percent, Marty has these words of wisdom: "We advise to keep everything separate as much as possible," he says. "280e only applies to businesses that buy and sell cannabis or grow and sell cannabis. Keep your real estate in a separate entity, keep that retail footprint small, don't spend much on advertising, and keep your retail labor down. Those are the costs that aren't deductible."

A Reagan-Era Law

Dean Guske, a CPA in Washington and Oregon with over 250 clients in the cannabis industry, says the tax code itself cannot be blamed for a business's success or failure--but it creates a huge financial hurdle for these companies. If you sell $1 million in cannabis, which you bought for $500,000, and you have another $400,000 in expenses, your net profit is $100,000. But under 280e you tax rate isn't computed on the $100,000 profit, it's computed on the $500,000.

Guske says he does what he can for his clients, but the law is the law. At the end of the day, he sees 280e as a remnant of President Reagan-era anti-marijuana propaganda.

"You have to remember that 280e applies to all schedule I and schedule II drugs. We have valid public policy reasons not to encourage certain types of drugs like meth, cocaine, and heroin, but the majority of Americans approve of adult use of cannabis and states are legalizing [its] sale and distribution, and giving out licenses to do so," he says. "I don't think 280e is appropriate. It needs to be updated to apply with current attitudes and laws concerning cannabis."

The One-Word Amendment

Hank Levy, a CPA in Oakland who does the taxes of some of the largest dispensaries in the area and across Arizona, and Washington, D.C., says there's not much he can do for these clients come tax time.

"It makes me angry whenever I prepare a tax return under 280e. As a CPA we live and die on the creative use of these rules. But we can't get too creative here," he says.

There's a lot that lawmakers could do, however, to change the tax code and ease the burden on this nascent industry. And it wouldn't even require much effort, Levy says. "It can actually be changed by one word. Congress could change 'if it is illegal under federal or state law' to 'if it's illegal under federal and state law,'" he says. Using the word "and" would effectively make 280e disappear in states where cannabis is legal.