While Colorado was the very first state to legalize the recreational use of marijuana, it definitely wasn't the last. Alaska, Washington D.C., Oregon and even Washington State (among others) have also jumped on board with many other states expected to vote on this issue in the next 24 months. Oklahoma is another state to be added to the list; it just passed SQ 788 that makes medical marijuana legal in the state. But what does this mean for dispensary owners and their taxes?
While the movement to legalize marijuana has gained steam on a state level, the federal government still hasn't budged on the issue at hand, and as a result, marijuana is still treated as a controlled substance. This means, on a federal level, for example, transporting pot across state lines.
Due to the issues mentioned above, there are some tax issues a dispensary should consider.
Tax Issues Related to Marijuana
One of the laws that affects those who sell marijuana is Section 280E. This law states that a deduction is not allowed for any amount of money spent that relates to the trafficking of a controlled substance. Since marijuana is a Schedule I controlled substance, the Internal Revenue Service (IRS) has the ammunition needed to deny any deductions made by the facilities (dispensaries) that sell this drug. However, case law has carved out some exceptions.
Business taxes for marijuana facilities are monitored/managed by section 208E. This is a common classification and used by medical marijuana dispensaries, as well as those who create edibles. There are many federally legal businesses that are able to remain afloat because they benefit from various tax credits, and because they are able to deduct the cost of goods sold ("COGS"). Some crafty dispensaries (and other drug "dealers") in other States have "strained" the limits of COGS to include almost every type of business expense. These cases show that COGS is not nearly so broad.
So, Where Are We?
Here is what we can determine from the cases at this point. COGS includes only the expenses associated with the production of a product. For cannabis producers, that means costs such as seeds, soil, water and nutrients, and expenses related to the cultivation and harvesting of the plant are deductible. However, costs associated with distribution, sale, administration, management, promotion, advertisement, overhead and support are not allowable. These include rent, shipping, most employee expenditures, most contractor expenses, legal, management, accounting, overhead, compliance, etc.
What's the Solution?
For dispensaries today, the best option they have right now is prevention. Speak with a qualified accountant or lawyer to find out what options you have and what the best option is to help properly classify tax-related expenses, comply with the emerging new laws and avoid audits. The time to do that is now. In the long run, this will provide you with the most up-to-date information and help ensure you don't have to pay too much to run and manage a marijuana dispensary business.
Should you choose to navigate this minefield alone, there is still hope. Hire a local licensed tax professional to represent you in an audit, as well as for representation in any later resolution of IRS collection efforts. Talk to an experienced tax attorney to help you with your business today. Call Travis W. Watkins Tax Resolution and Accounting Firm today for your Free consultation at 800-721-7054.
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