Beck v. Commissioner, T.C. Memo. 2015-149 Filed August 10, 2015.
Certain states may have legalized medical marijuana but Federal law still lists it as a controlled substance. This means that medical marijuana dispensaries are still subject to punitive rules that apply to other forms of drug trafficking, such as cocaine or heroin. When I was perusing the Tax Court opinion page this week, I found the Beck case, listed above, and I was reminded that under the Internal Revenue Code, businesses that engage in trafficking scheduled drugs are not allowed any deduction or credit related to that business except for cost of goods sold (i.e. the cost to produce or sell goods). In practice, this means that taxable income for medical marijuana dispensaries is calculated as follows: gross income less cost of goods sold = taxable income. Expenses such as rent, insurance, wages, hell even postage, are not deductible…period. As you can imagine, the amount of taxes assessed may be in excess of the actual cash profit such a business makes. Negative cash flow is not a great way to conduct business (in Beck’s case, he was assessed 1.2 million in taxes and penalties).
It will be interesting to see how this all plays out, no matter your view on the merits of medical marijuana. The trend seems to be that more and more states are passing laws regarding medical marijuana, At some point, the subject of amending 280E will come up and likely amended or “clarified”. In case you are interested, here are two other cases involving medical marijuana dispensaries: Olive v. Commissioner, 139 T.C. 2. Filed August 2, 2012; Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 14. Filed May 15, 2007.