A ruling issued last Thursday by the US Tax Court has established that medical marijuana businesses may not deduct their expenses. This ruling will impact all 17 medical marijuana states, as well as the District of Columbia.
Tax Court Judge Diane Kroupa explained, “The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law. Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses occurred in a medical marijuana dispensary business. This is true even if the business is legal under state law.”
This ruling has the potential to greatly impact medical marijuana businesses. Dispensary owners could have a more difficult time securing valuable tax deductions, especially if they have not maintained reliable sales records, making their businesses more of a financial burden to run.
In certain cases so far, tax investigators have found that medical marijuana businesses have under-reported their income; in some cases the discrepancy was over $1 million dollars.
In addition, collective owners have sought to deduct a number of business expenses, including paraphernalia, baggies, equipment, and even cost of goods sold.
However, federal allow does not allow tax deductions for a trade of business that “consists of trafficking in controlled substances.” This means that medical marijuana collectives and their owners are ineligible for tax breaks that other types of business owners may receive.
In a previous case in California, tax court allowed medical marijuana dispensaries to deduct expenses related specifically to the business of medical caregiving, such as massage therapy, yoga classes, or growing classes. However, it has now been determined that if the primary purpose of the business is to dispense medical marijuana, no deductions may be made.