Following up on our previous post, those squares at the IRS have once again killed the collective buzz of an otherwise law-abiding medicinal marijuana facility and its clients:
When is a valid business expense deduction not a valid business expense deduction? When you are running one of the country’s largest, most successful medical marijuana dispensaries, that’s when. You see, back in 1982, Code Sec. 280E was added to the Internal Revenue Code. We all remember the “war on drugs”, right? Well, Congress decided that one way to crack down on drug traffickers was to disallow them any deductions incurred in the process of drug trafficking. Specifically, Code Sec. 280E provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business . . . consists of trafficking in controlled substances . . . which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Now, I don’t know how compliant your average, run of the mill drug trafficker is with his or her tax filing obligations, but this would be quite a bitter pill to swallow (pun intended).
Fast forward to 2011. Many states have now passed legislation that makes the use of medical marijuana legal. At the forefront of this movement was the State of California, home of the Harborside Health Center. Recently, the IRS used Sec. 280E to deny Harborside a deduction for many general business deductions. As you can imagine, this generated quite a tax obligation, one that may put the company (and likely many other dispensaries like them) out of business.
Stay tuned for further developments, as this is likely to be an evolving issue as more and more states look at medical marijuana legislation. The full article can be found here.