Taxes, Pot and Your Business
Taxes, Pot and Your Business.
If you run a legal business selling medical marijuana, can you take federal tax deductions for business expenses allowed for any business? Out west, the answer is no and here is the explanation.
Let’s start with an important caveat: Selling marijuana for recreational use in New York State is illegal. But we can see the future in other parts of the country.
In Alpenglow v. IRS, a clash was presented between state and federal policies. Colorado legalized medical and recreational marijuana. The federal government, however, maintains marijuana as a “controlled substance”. The Controlled Substances Act makes it unlawful to knowingly or intentionally manufacture, distribute or dispense a controlled substance. Under former President Obama, the Justice Department had declined to enforce the law against marijuana businesses acting in accordance with state law. The IRS, however, has consistently denied business deductions to state-approved marijuana dispensaries due to a provision of the law which prohibits any deduction or credit for any business that consists of trafficking in controlled substances within the meaning of the Controlled Substances Act. [And according to the decision, the Department of Justice has specifically rescinded its policy of non-prosecution under Attorney General Jeff Sessions].
The deductions in the case included rent for where the business was conducted, cost of labor, compensation of officers, advertising, taxes and licenses for doing business, depreciation, and other wages and salaries.
The holding of the Unites States Court of Appeals for the Tenth Circuit noted that, historically, business expense deductions “are a matter of grace” from Congress and thus Congress can disallow them as it chooses. In passing a section of the US Code, Congress denied ordinary and necessary business expenses incurred by businesses engaged in drug trafficking. Based upon this statute, and several others, the appellate court ruled that the lawsuit brought by the medical marijuana business owners against the IRS for denying the business deductions was properly dismissed.
In the current legal and political climate, there may well be more of these challenges. If and when New York approves recreational marijuana, given the prominence of New York in the legal field, we anticipate cutting edge lawsuits on this and other “controlled substances” issues.
It is our intention to become your source for information in this brave new world.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Robert M. Lefland is Senior Counsel and primary attorney in charge of Personal Injury at J&G. He can be reached by calling 866.303.9595 toll free or 845.764.9656 and by email . He is available by appointment on Saturday’s. If you need his immediate attention, you can reach him on cell.