The IRS Is Attacking the Medical Marijuana Business

March 30, 2012

Generally a business can deduct normal business expenses such as rent, payroll, etc. However, the IRS is using an obscure section of the code passed during the Reagan Administration as part of the “War on Drugs” to deny normal business expenses to medical marijuana-related businesses.

§ 280E Expenditures in connection with the illegal sale of drugs – 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 (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Since cannabis (marijuana) falls under the Controlled Substances Act, businesses marketing medical marijuana are subject to IRC Section 280E and are not allowed to deduct business expenses.

The IRS recently used this code section to deny business expenses to the nation’s largest medical marijuana dispensers, Harborside Health Center, based in Oakland, CA. As result the firm was hit with an adjustment of $2.5 million for the 2007 and 2008 tax years.

There has been some Congressional support to change the law. Representative Pete Stark, a California Democrat has introduced legislation (the Small Business Equity Tax Act) that would allow medical marijuana dispensaries to deduct normal business expenses.

Harborside was probably picked by the IRS for audit since they are the largest dispenser in the industry. In the meantime, while this shakes itself out, it has sent chills though the medical marijuana industry and could be the swan song for the industry.