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IRS Ruling on Cannabis Dispensaries: No deductions unless Congress reschedules pot.

Excerpts from the December 16, 2011 IRS letter to Representative Barney Frank:

“Congress enacted section 280E of the Internal Revenue Code (Code) in 1982 to deny tax deductions to individuals trafficking in illegal drugs.”

“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.  See Californians Helping to Alleviate Medical Problems, Inc. v. C.I.R., 128 T.C. No. 14 (2007).  The United States Supreme Court has concluded that no exception in the Controlled Substances Act exists for marijuana that is medically necessary.  U.S. v. Oakland Cannabis Buyers’ Co-op., 532 U.S. 483 (2001).”  

“Because neither section 280E nor the Controlled Substances Act makes exception for medically necessary marijuana, we lack the authority to publish the guidance that you request.  The result you seek would require the Congress to amend either the Internal Revenue Code or the Controlled Substances Act.”

In other words:

 Dispensaries cannot deduct payroll, rent, health insurance or worker’s compensation insurance — deductions that are standard for many other industries. The only two things the IRS says dispensaries can deduct are the cost of buying cannabis and the cost of alternative health care services such as massage or acupuncture. After those two deductions they pay 35% of what they make to the feds.

Or as Luigi Zamarra over at Harborside put it, “if Harborside bought marijuana for $60, sold it for $100 and used the entire $40 in income to pay salaries, rent and other expenses, the IRS would still demand that we pay 35 percent tax on the $40.”

John Entwistle notes: This means that Harborside over inOakland owes back taxes of $2.5 million dollars but more importantly it affects similar businesses everywhere. From Seattle, Washington to San Diego, California to Colorado to Washington DC all the way up to Maine dispensaries are subject to this tax ruling. As the folks at the IRS say so clearly, the answer to the problem is to reschedule marijuana. The article in Bay Citizen is very good and the letters from the IRS are also extremely interesting source materials.

Sources: http://www.baycitizen.org/marijuana/story/irs-oaklands-largest-pot-dispensary-owes/

http://www.irs.gov/pub/irs-wd/11-0005.pdf