In Olive v. Commissioner of Internal Revenue 792 F. 3d 1146 (7/9/15), the Ninth Circuit recently upheld the decision of the U.S. Tax Court which precluded a marijuana dispensary from deducting any ordinary or necessary business expenses when determining its income for income tax purposes.
The Vapor Room Herbal Center is a medical marijuana dispensary in San Francisco owned by Martin Olive. In 2004 and 2005 it deducted a total of $654,071 as business expenses on its income tax returns, declaring a net income of approximately $100,000. The Internal Revenue Service disallowed those deductions under Internal Revenue Section 280E which provides:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on of any such trade or business in (or the activities which comprise such trade or business) consisted of trafficking in controlled substances (within the meaning of Schedule 1 and 2 of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which the trade or business is conducted.
While the Internal Revenue Code normally allows the deduction of business expenses in determining gross income, under IRC Section 208E such deductions are not allowed. The court indicated that, although the use and sale of medical marijuana may be legal under California law, the sale of marijuana remains prohibited under federal law.
The Vapor Room’s argument that, because marijuana dispensaries are now legal in many states the court should allow such deductions, fell on deaf ears. As the court indicated “if Congress now thinks that the policy embodied in Section 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.
This puts the owners of dispensaries in a serious dilemma. As dispensaries try to come into conformance with the law, those that file full and accurate income tax returns may find themselves in the crosshairs of the Internal Revenue Service and quickly forced out of business for failure to pay all income taxes due. If you are running any marijuana related business you should consult with an accountant to assure that you do not get into serious difficulty with the IRS.
(The author is not a tax expert and is not qualified to give tax advice.)