For most citizens, the concept of a medical marijuana dispensary paying taxes is no different than that of a fast food restaurant, liquor store or pharmacy. But for dispensary owners and their accountants, the story changes. Today, Forbes lent some insight into what it exactly dispensaries need to keep in mind for their taxes.
Forbes contributor and tax lawyer Robert W. Wood says the heart of the issue is in the tug of war between states and federal government. "Even if state law allows marijuana for medical use, federal law still classifies it as a controlled substance. Many legitimate businesses are being denied tax deductions," says Wood.
Section 280E of the tax code is especially tricky, as it outlines what you can't take deductions on. As outlined in United States Code, Title 26, Subtitle A, Chapter 1, Subchapter B, Part IX, § 280E:
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.
Or, in other words, if Uncle Sam says it's illegal, you shouldn't try to deduct it on your taxes. And while Wood points out that the code intends to "stop drug dealers from claiming tax deductions," the effect within the medical marijuana industry has been a matter of contention.
There's even a 280E Reform group looking to clarify the code and keep the IRS from steamrolling a business in the name of the federal war on marijuana.
Wood notes that while the law boils down to "no deductions for marijuana," the U.S. Tax Court has, however, allowed for dispensaries to deduct non-marijuana activities like care-giving, counseling and advocacy. "That makes good record-keeping essential," Wood says, "perhaps even more important than with other businesses."
Are dispensaries in a legal black hole during tax season, where they operate their business against all odds? Even the most adept tax preparer or accountant would pause before answering. But with more states pondering a world of legal marijuana, businesses are optimistically navigating through laws, fighting to legally pay taxes, just like your average burger joint, liquor store or pharmacy.
