US Tax Court Ruling Disqualifies All Dispensaries From Most Tax Deductions
There was a big federal tax court decision last week that will no doubt affect every dispensary in America. The decision in Olive v. Commissioner, 139 T.C. No. 2, a case out of California, disqualifies all medical marijuana distributors from most tax deductions. The ruling by the United States Tax Court, which oversees disputes over federal income tax, was unanimous. A unanimous decision leaves little hope that it will be overturned on appeal.
"The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law," Tax Court Judge Diane L. Kroupa wrote. "Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business. This is true even if the business is legal under state law."
According to Accounting Today, "While his business was legitimate under California law, Section 280E of the Tax Code precludes a deduction of any amount for a trade or business where the “trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances … which is prohibited by federal law.”"
Robert Wood wrote an excellent article for Forbes, in which he described that some, but not all dispensaries deductions, are still valid. "The IRS and Tax Court must abide by Section 280E of the tax code. However, the U.S. Tax Court has allowed dispensaries todeduct other expenses distinct fromdispensing marijuana. See Californians Helping to Alleviate Medical Problems Inc. v. Commissioner. If a dispensary sells marijuana andalsoengages in the separate business of care-giving, the caregiving expenses are deductible. If only 10% of the premises is used to dispense marijuana, most of the rent is deductible. Still, good record-keeping is essential. See Medical Marijuana Dispensaries Persist Despite Tax Obstacles."
Almost every ganja-preneur that I know is trying to open a collective/dispensary/club. I wonder how many of them changed their mind when they saw this decision get handed down. I wonder how many of them have no idea what 280e reform is? The scariest part about this case to me, is that they had a forensic accountant go so far back in time (8 years) to find their evidence. How many other dispensaries will experience the same fate? How many ongoing legal battles will be affected by this decision? One thing is for sure, there will no doubt be more battles ahead, and we need to push Congress for 280e reform, NOW!