October 5, 2011
Tax Code May Kill Medical Marijuana IndustryIn accordance with a 2007 Tax Court decision (Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. No. 14) and a 2010 IRS Chief Counsel Letter (2011-0005)), the IRS last week issued a ruling to Harborside Health Center that § 280E prohibits the deduction of any expenses of its medical marijuana dispensary:
Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term “controlled substances” has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act.
The denial of deductions for rent, payroll, health insurance, and worker’s compensation insurance resulted in an additional $2.4 million tax liability for 2007 and 2008 (the IRS is examining Harborside's 2009 and 2010 returns). Harborside paid over $2 million to California and $1 million to Oakland in medical marijuana excise taxes last year. Congressman Pete Stark has introduced a bill to allow medical marijuana dispensaries to deduct its expenses like other businesses, but the bill's fate is uncertain. Harborside claims the IRS's position will drive it and other medical marijuana dispensaries out of business.
- The Atlantic, How the Tax Code Could Destroy Medical Marijuana
- The Bay Citizen, IRS: Oakland's Largest Pot Dispensary Owes Millions
- MSNBC, IRS Ruling Strikes Fear in Medical Marijuana Industry
- San Francisco Chronicle, Oakland Pot Dispensary Gets $2.5 Million IRS Bill
- TaxProf Blog, IRS Tries to Bogart Medical Marijuana Club's Deductions
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You'd think that the industry would still be very profitable? The overhead is typically pretty small, and the dispensaries don't need to be very large. Still, an unfortunate move by the IRS.
Posted by: Phoenix Criminal Lawyer | Oct 5, 2011 6:27:01 PM
It is a crazy policy.
On one hand, the government expects illegal businesses to report all of their income (shades of Al Capone) and therefore pay their taxes and on the other hand, they want to disallow deductions that any other business would be allowed to deduct.
They can't have it both ways.
Posted by: Keith Gormezano, Advanced Certified QuickBooks ProAdvisor in Seattle | Oct 6, 2011 9:00:48 PM