The legality of marijuana in many American states is questionable. However, medical marijuana can easily be obtained via a doctor’s prescription and is legal in 34 states. Also, around 18 states have allowed recreational marijuana – this is the regulated dose of marijuana without a prescription.
While thousands of marijuana dispensaries operate legally in the United States, it is still technically illegal at the Federal level, going by the federal Controlled Substance Act. As a result, for the purpose of federal income tax, marijuana is addressed differently for federal tax purposes.
There is a provision for this tax code in the 1970 tax deductions, which takes care of business expenses of illegal trafficking stated in the Controlled Substance Act. Interestingly, one can have deductions for other illegal businesses like prostitution.
The idea behind this law was to prevent drug dealers from going for tax deductions which Uncle Sam specified applies to marijuana dispensaries. There have been audits of several significant dispensaries, which resulted in denial of business deductions like rent, legal fees, advertising, depreciating, utilities, etc. In some instances, Uncle Sam mandated that such audited dispensaries pay back such taxes, which could amount to millions of dollars.
Deducting the Cost of Goods Sold
Section 280E, however, only applies to bar deductions that you take against gross income. The implication is that marijuana dispensaries can deduct the cost of goods since it is not a business deduction technically. However, one will subtract it from gross receipts to estimate the gross income of a taxpayer.
As a result, a dispensary owner can deduct the fees associated with buying marijuana from the grower. According to Uncle Sam, marijuana dispensaries can deduct:
The price of the marijuana as revealed on the invoice, removing trade or any discount
Any transportation fee incurred to purchase marijuana
Producers of marijuana may also deduct the cost of goods sold, and their deduction is more than dispensaries. Producers are allowed to deduct:
Cost of materials like marijuana plants or seeds
Costs associated with labor like planting, harvesting, sorting and cultivating
Other indirect expenses like repairs, rent, maintenance, utilities and costs of inspection and quality control.
Operate Distinct Businesses
Marijuana dispensaries, in a bid to avoid section 280E, do claim the operation of more than one business for the purpose of tax marijuana business and a business without any relationship with marijuana. You should be able to deduct any expense associated with the non-marijuana business entirely.
For instance, in one case, a dispensary had a successful argument with the Tax Court that it had a single business selling marijuana and another one that focused on care to patients. The owner of the company had years of experience in patients' health care.
His intention behind the dispensary was to have caregiving as the primary feature, with the support of medical marijuana. He also provided instructions on the best way to consume it, which was his secondary feature. Based on the court’s ruling, he was able to deduct expenses for the caregiving features.
This approach, however, has not been successful for other dispensaries that have tried it. For instance, the tax court revealed that a distinct corporation established by a marijuana dispensary to give human resources services to its workers is not a specific business.
In addition, there was no particular business where the dispensary offered items like pens, books, mugs alongside marijuana for sale. Based on the court's ruling, such deals were incidental to selling a marijuana business, not another separate business.
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