As far as paying taxes are concerned, the marijuana industry is still in a bit of a flux. Although already legal for medical use in 18 states and Washington D.C., marijuana is still considered a controlled substance by the federal government. So by extension, the IRS–which is a federal organization–considers marijuana an illegal substance as well.
Marijuana has been proven to have numerous benefits with regard to health and mental well-being, and it even has uses in business, industry, and everyday life. A number of proponents of marijuana legalization also claim that legalization would result in significant savings in law enforcement, trial, and incarceration costs, and that taxing growers and sellers would help the government earn billions of dollars in a few years.
All these benefits are irrelevant to the IRS, which still considers marijuana a controlled substance. This has significant implications on growers and sellers from a taxation standpoint, since the law expressly denies tax deductions for businesses dealing with controlled substances. This means that legitimate marijuana growers and sellers are basically given the same tax restrictions as those that deal in the more dangerous illegal drugs. Marijuana dispensaries are therefore basically operating under strict tax laws, even if they aren’t breaking any laws in their respective states.
Even with the tax restrictions imposed by the IRS as mandated by Section 280E, marijuana dispensaries may still deduct certain expenses that are not directly related to the sale and cultivation of marijuana due to a loophole presented allowed by the U.S. Tax Office. For example, a marijuana dispensary that also provides caregiving services will be able to file deductions for costs incurred running the caregiving aspect of the business. Dispensaries may also be eligible for deductions on the rent of their business space, if less than 10% of the total space is used for dispensing marijuana.
In order to benefit from these deductions, it is essential for businesses in the legal marijuana trade to keep careful records of all their business related expenses. However, even the best-kept records won’t help businesses in which the bulk of the income is earned from marijuana sales, nor will it make it possible to file deductions for equipment used in ingesting marijuana. In the landmark case of Olive v. Commissioner, it was deemed that the practice of providing marijuana to users via a vaporizer and the fact that the operator ran only a marijuana dispensary business, made it fall under the restrictions of Section 280E.
Although it has since been revealed that the business, owned by Martin Olive, had other tax related issues to deal with, the fact remains that any marijuana dispensary that operates in the U.S. is subject to these restrictive tax laws. Although the previously mentioned loophole allowed by the U.S. Tax Office does provide some leeway, it will require nothing short of a repeal of Section 280E before owners and operators of marijuana dispensaries will be able to benefit from the tax deductions that are available to other legitimate businesses.