Cannabis is now legal for medical use in 26 states and recreational use in eight. In 1991, 78% of Americans opposed marijuana legalization. A national poll conducted in February 2017 by Quinnipiac University finds 59 percent of adults surveyed favored the legalization of marijuana use in the United States, and 93 percent supported allowing adults to legally use medical marijuana if their doctor prescribes it. This support is growing yearly, even monthly. The marijuana industry seems to be booming, but business owners may disagree. Even if state law permits sale, federal law does not. However, I.R.C. §61(a) does not differentiate between income from legal sources and income from illegal sources. Therefore, marijuana businesses are still required to pay federal income tax on taxable income.
Although I.R.C. §162 allows businesses to deduct ordinary and necessary expenses such as wages, rent, supplies, etc., businesses trafficking marijuana are excluded due to I.R.C. §280E. This code states that 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. Marijuana used for any purpose is a controlled substance. Therefore, marijuana businesses are required to report all income while, at the same time, restricted to deduct the aforementioned ordinary and necessary expenses.
One provision available for marijuana businesses is to deduct cost of goods sold (COGS). These are costs directly related to the production of goods. This would include the cost of the marijuana itself, the means to transport it, etc. On January 23, 2015, the IRS released a memorandum to clarify how marijuana businesses are to determine COGS. Under I.R.C. §263A, certain costs associated with purchasing, handling and storage are not eligible for deduction. See the specific guidelines on cannabis tax laws.
The Law Office of Thomas Hogan is a Cannabis Tax Law Specialist in Modesto, California. We are prepared to help in your time of need. Feel free to contact our Modesto California Attorneys at (209) 214-6600.