Marijuana dispensaries face tax challenges that regular businesses do not. While regular businesses can deduct their ordinary and necessary business expenses, marijuana dispensaries by and large cannot due to IRC 280E.
“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.”
IRC 280E
As a result of 280E, cannabis businesses engaged in the buying and selling of marijuana may not deduct ordinary and necessary business expenses. Of course, as with many rules in law, there are narrow exceptions. That exception was evidenced in the CHAMP case, and while other marijuana dispensaries have made similar arguments to the CHAMP taxpayer, few tax attorneys have succeeded in deducting their expenses.
CHAMP
Marijuana dispensaries have tried to deduct business expenses under various theories, but the most successful avenue for deductions (apart from cost of goods sold which is not a deduction), is that found in the CHAMP decision. In that case, the marijuana dispensary was able to deduct expenses attributable to its separate business of caregiving services as the separate business did not consist of trafficking in a controlled substance, and thus its expenses were not barred by IRC 280E.
Separate Business With Deductible Expenses
Following the CHAMP decision marijuana dispensaries have attempted to paint their sale of non-marijuana merchandise such as pipes, rolling paper, clothing, and even branding as separate trades or businesses with little success. In analyzing whether selling non-marijuana merchandise is a separate business, tax courts view the question as an issue of fact that depends on, among other things, the degree of economic interrelationship between the two activities.
Complementary To The Unitary Business of Selling Marijuana
Unfortunately for marijuana dispensaries, courts often view the sale of non-marijuana merchandise as complementary to the dispensary’s efforts to sell marijuana. For instance, in Alterman, the court found that the sale of pipes and other marijuana paraphernalia complemented the unitary business of selling marijuana. In a footnote, the court even noted that while it found based on a preponderance of the evidence that the dispensary did not sell hats and T-shirts with the dispensary’s logo, marijuana-themed magazines, and chicken soup, even if those items were sold, such sales would nevertheless complement the sale of marijuana. The court in Harborside similarly found that the sale of non-marijuana items such as clothing, hemp bags, and marijuana paraphernalia shared a close and inseparable organizational and economic relationship with, and was incident to, the dispensary’s primary business of selling marijuana; to which, the dispensary was barred from deducting those expenses under IRC 280E.
In summary, while it can be tempting for your marijuana dispensary to pursue tax deductions by creating a separate non-marijuana business if that business compliments the sale of marijuana you may just be setting yourself up for back taxes and penalties. A better way to mitigate your tax liability is through coordination with a marijuana tax attorney, cannabis CPA, and competent bookkeeper. Good accounting records can help you substantiate properly calculated costs of goods sold and mitigate the negative consequences of an audit.