San Francisco, CA: Medical cannabis dispensaries operating in accordance with state law are nonetheless prohibited from claiming standardized business deductions on their federal tax returns, according to a US Tax Court ruling.
Opining earlier this month in Olive v. Commissioner of Internal Revenue, Tax Court Judge Diane L. Kroupa held: "Federal law prohibits taxpayers ... from deducting any expense of a trade or business that consists of the trafficking of a controlled substance such as marijuana. ... This is true even if the business is legal under state law."
The ruling upholds the application of a federal tax code provision, Section 280E, in instances where taxpaying operations are compliant with state laws that allow for the limited legalization of cannabis for therapeutic purposes. Section 280E states that a taxpayer may not deduct expenses in any instance where the "trade or business ... consists of trafficking in controlled substances."
Opined Kroupa: "Petitioner argues that he may deduct the Vapor Room's expenses notwithstanding section 280E because, he claims, the Vapor Room's business did not consist of the illegal trafficking in a controlled substance. He argues that the illegal trafficking in controlled substances is the only activity covered by section 280E. We disagree that section 280E is that narrow and does not apply here. We therefore reject petitioner's contention that section 280E does not apply because the Vapor Room was a legitimate operation under California law."
The Internal Revenue Service (IRS) previously ruled in October that that marijuana dispensaries can not claim standard business expenses such as payroll, security or rent on their federally filed tax returns.