Even If the DEA Leaves Medical Marijuana Suppliers Alone, the IRS Won't

In March I noted the double bind faced by the operators of medical marijuana dispensaries vis-á-vis the IRS: Even though their income comes from a business that the federal government deems illegitimate, they can be prosecuted for failing to report it. But if they do file a tax return, they may not deduct their business expenses: Section 280E of the Internal Revenue Code says "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." In effect, medical marijuana suppliers are expected to pay taxes on their gross revenue instead of their profits. Forbes tax columnist Robert W. Wood reports that the IRS has confirmed this understanding of the law in response to inquiries from several members of Congress who are understandably concerned that it threatens to put dispensaries in their states out of business. Wood says one way out of this untenable situation is "having two lines of business and segregating their activities":

One U.S. Tax Court ruling says marijuana dispensaries can legally deduct expenses associated with all activities except dispensing marijuana. See Californians Helping to Alleviate Medical Problems Inc. v. Commissioner. Although this case disallowed the expenses of selling marijuana, it ruled that the dispensary was also engaged in the business of care-giving. All those expenses were OK. It turned out only about 10% of the premises were used to dispense marijuana, and that made most of the rent deductible.  

The tax issue would still be a problem even if the Obama administration delivered on its promise of forbearance regarding dispensaries, since that policy applies only to drug prosecutions by the Justice Department.

[Thanks to Richard Cowan for the tip.]