Taxation of Marijuana:
The enactment of IRC §280E plays the biggest role in the taxation of the Marijuana industry.
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
In other words, a marijuana facility cannot deduct its business expenses. Imagine paying more tax than the income you earned. Through case law, cost of goods sold (“COGS”) has been the one deduction allowed and debatably IRC §263 if it involves COGS. Thus, if you are in the marijuana dispensary business, chances are your rent, utilities, salaries, and general and administrative expenses are non-deductible.
COGS is calculated as follows:
+ Production Costs (if applicable)
- Ending Inventory
In Alterman v. Commissioner, a marijuana dispensary sold, purchased, and produced marijuana products. The dispensary also sold “non-marijuana products,” such as pipes, papers, and other items used to consume marijuana. Based on tax cases, if the costs are generated to a separate line of business, which is non-marijuana related, then business expenses are deductible and not just limited to COGS. However, if the non-marijuana sales are in conjunction with the marijuana sales then §280E applies.
Here, the other lines of business were minimal and indistinguishable from the marijuana sales. In fact, the taxpayers failed to keep adequate records of the other products sold or even their cost of inventory. Keep in mind, if the IRS audits you, the amount they calculate will not be favorable to you. Based on their failure to maintain adequate records, the court found that the taxpayers expenses, other than COGS, were non-deductible.
Whether you are in the dispensary business or not, it is of utmost importance to maintain adequate records. This is the most common problem we see in small business. Don’t let an audit catches you off-guard, proper planning and effective record keeping will save you thousands.
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