The IRS recently released a legal memo with “potentially disastrous implications” for marijuana dispensary owners in Denver. The memo could result in audits, higher tax bills, and even federal raids for cannabis retailers.
Under the Internal Revenue Code section 280E, virtually every American business can deduct ordinary expenses such as rent and utilities when reporting to the IRS; however, “traffickers” of a Schedule I or Schedule II substance cannot deduct these same expenses. This ultimately led to tax bills so high that many claimed “they were being taxed to death.”
Californians Helping to Alleviate Medical Problems, Inc. (CHAMP) v. Commissioner of Internal Revenue resulted in a compromise that allowed Substance I and II traffickers could deduct the cost of ancillary services such as yoga, acupuncture, community events, etc. Traffickers were also allowed to deduct the cost of goods sold.
The rules outlined in the new memo are devastating to this standard. Not only does the memo state, “Nothing in the legislative history of §263A suggests that Congress intended to permit a taxpayer to circumvent §280E by treating a disallowed deduction as an inventoriable cost or as any other kind of capitalized cost” but it also encourages IRS agents to pursue potentially lucrative audits against marijuana dispensaries: “When a producer or reseller of a Schedule I or Schedule II substance uses a method of accounting that causes a tax result contrary to… the legislative history of §280E, the proper exercise of the above-mentioned authority is warranted.”
What does this mean for dispensary owners? The new memo could lead to devastating audits, resulting in bills for years of back taxes that would effectively put dozens of dispensaries out of business. Any dispensary owner who refuse to an audit could simply be raided, instead.
Dispensary owners may have defeated the DEA, but now they face an even more formidable opponent: the IRS.
Source: National Cannabis Chamber of Commerce and The Leaf Online