IRS Instructions on Marijuana Business Deductions

For business owners in Colorado and Washington State, or even where businesses sell medical marijuana, filing taxes can be complicated. As tax season draws near, the IRS has provided guidelines for filing taxes related to marijuana profits, though they could result in a heavy burden. Currently, four states have legalized marijuana for medical use. Despite states loosening their restrictions on pot, the federal government continues to maintain that the drug is a controlled substance. The conflict between state and federal law creates the potential for criminal liability–and what about taxes?

Normal business owners will be responsible for paying state and federal income taxes, wage taxes and other expenses related to business operation. For those in the marijuana industry, filing taxes on your business means admitting to the federal government that you are committing a crime. Some have taken on this issue by filing a complaint alleging that even paying state taxes amounts to a violation of the 5th Amendment. The lawsuit challenges the taxes by claiming that you have the right not to incriminate yourself.

Given the ever-contentious legal landscape of marijuana regulations, what are law-abiding tax payers supposed to do? States are greedy to get their hands on the potentially lucrative cash crop of marijuana, along with the IRS. Under the federal tax code, even profits made from a criminal enterprise must be reported as income.

This means legal medical marijuana businesses have to confront significant tax issues under federal law. If they do not report their business and profits, they could be slapped with crimes related to tax evasion. If they do report, they could face significant tax burdens, as well as face potential criminal liability. According to the IRS, they have no choice but to enforce the tax code, meaning that even legal dispensaries will be denied deductions as marijuana is considered a controlled substance.

According to a recent Forbes’ blog from a tax experts, dispensary owners could deduct their expenses from another business, separate from a marijuana enterprise. For example, the owner could create another kind of business, deduct from that and only claim a certain percentage of income from marijuana expenses. All business owners must keep detailed records in the event of an audit, and as tax accountants and marijuana business owners know, there is only so much you can fib with tax filing.

The IRS has issued its own guidelines on how marijuana dispensary owners should proceed. Under the IRS guidance, filers get to determine the cost of goods sold. While it prohibits deductions on marijuana, it does not prohibit deductions on the cost of goods sold. Marijuana businesses have the incentive to capitalize on costs rather than claim an immediate deduction. The IRS is left to determine the difference between the costs that are part of selling the drugs, yet wages, rents and repairs can all be deducted as part of the “cost of goods sold.”

For the sake of easing complicated audits and difficulties in filing, many distributors, legislators, and other marijuana activists are anxiously awaiting the Marijuana Tax Equity Act, which would put an end to the federal prohibition of marijuana and allow for more transparency in state and federal filing. Our Orange County marijuana attorneys can help assist with compliance, tax issues, and other complications of marijuana law in California.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, collectives, patients and those facing marijuana charges. Call us at 949-375-4734.

More Blog Entries:
D.C. Decriminalizes Marijuana, Federal Land Raises Legal Complications, July 16, 2014 Los Angeles Marijuana Lawyer Blog
United States Marijuana Laws Influencing Other Countries, February 14, 2014, Los Angeles Marijuana Lawyer Blog