It’s almost impossible not to notice the wave of marijuana legalization spreading across the country. Even Congress is getting into the act. Research hemp crops were recently included in the 2014 Farm Bill. Furthermore, Congress defunded DEA raids on state-legal marijuana facilities in the 2015 stop-gap funding bill.
Regardless of one’s personal feelings on this topic, it’s obvious that voters, legislators, and Congress are, for the most part, on board for the ride. In some states, this is driven by the expected tax revenue. The IRS, however, still has a few things to say when it comes to marijuana.
First of all, for those folks out there that are already medical marijuana patients or have considered getting their “card,” you should know that the costs of obtaining medical marijuana are NOT deductible as a medical expense on Schedule A of your personal income tax return. The reason for this is that marijuana is still classified as a Schedule I drug by the United States Controlled Substances Act.
If you have deducted your medical marijuana expenses in the past, and you ever get audited, do note that this deduction will be disallowed, and you’ll be subject to paying taxes, penalties, and interest as a result. In order to claim a deduction for this in the future, Congress will need to reclassify cannabis as, at the least, a Schedule II drug. If this is an important personal issue to you, your best course of action right now is to lobby your representative and senator, rather than testing this in tax court (it’s already been tested, and the IRS won).
On the business side of things, it gets even more complicated. Under Internal Revenue Code Section 280E, dealers of Schedule I controlled substances are not permitted to deduct the ordinary business expenses involved in selling their products. This means that recreational and medical marijuana dispensary owners cannot deduct the most common business expenses incurred in running a business, such as rent, utilities, wages, marketing, security, etc. To get an idea of how the tax court is thinking about this subject, feel free to take a look at the Olive v. Commissioner case and the ruling of Judge Diane L. Kroupa.
Marijuana businesses are still allowed to take a Cost of Goods Sold (COGS) deduction from gross revenue. COGS includes the hard cost of acquiring marijuana for resale, for example.
Businesses that provide other services beyond just selling marijuana are allowed to deduct reasonable business expenses for those other services and products. For example, many medical marijuana stores also offer various naturopathic services, yoga classes, massage, etc. Expenses related to those services are deductible (reference: 128 TC 173 (2007)).
Whether you’re a medical marijuana patient or contemplating opening a marijuana related business, it’s important to seek proper legal, tax, and accounting counsel to make sure you stay on the right side of the law.