Tags: marijuana | tax | deduction | limitations | pot

Marijuana Tax Deduction Limitations Should Be Repealed

Marijuana Tax Deduction Limitations Should Be Repealed

By    |   Monday, 22 January 2018 07:13 AM

Thirty states have in various ways legalized the business of marijuana. 

Eight states have legalized recreational use besides medical uses.

Various news publications predict (for whatever that is worth) that in 2018 between 8 and 15 more states may decriminalize marijuana and enact a licensing and taxation regime.

Besides collecting a lot of extra money from an activity supported by most people in the United States, for the states, it has the added benefit of potentially emptying out the jails significantly and lowering the costs of enforcement.

Unfortunately, Congress is in a Reefer Madness time warp.

In 1970, Congress created a drug abuse regime which resulted in marijuana listed as a prohibited Schedule I drug along with heroin and opium.

Regardless of marijuana being illegal, to Congress the sale of marijuana was still taxable.

A tax court decision in 1981 allowed a marijuana dealer to make a cost of goods sold allowance and take business expense deductions just like a legal business.

As one would expect, this resulted in a knee-jerk Congressional reaction.

It added Internal Revenue Code section 280E  disallowing any business expense deductions for people in the business of trafficking in controlled substances listed as Schedule I drugs. Cost of goods sold remained allowable as an adjustment to gross income.

As a result, illegal drug traffickers found it disadvantageous to be in tax compliance. Like nearly all Congressional legislation this made an even greater mess of a problem for the public and law enforcement which Congress started in the first place.

The Department of Justice, early in the Obama administration, tried to give some limited guidance as to the DOJ’s attitude towards ameliorating the impact of federal drug laws applicable to the states legalizing marijuana.  

The Treasury, however, has issued no regulatory guidance on IRC sec. 280E. It takes the position that it is up to Congress, not the Treasury, to change either IRC sec. 280E or the Controlled Substances Act.

The sole guidance from the Treasury is an IRS 2015 Chief Counsel’s Advice dealing with the issues of cost of goods sold and the inventory method allowable for a controlled substance business.

As it stands now, from a federal perspective, a state-licensed marijuana business is still trafficking in a controlled substance and will not be allowed a deduction for ordinary and necessary trade or business expenses.

Attorney General Jefferson Beauregard Sessions III has announced that going forward the DOJ will enforce the Controlled Substances Act and, presumably, the DOJ will no longer look the other way.

The marijuana business represents millions, or even billions, of dollars of potential taxes for the states, increasing employment, improvement of properties, and many positive political benefits flowing from a lot of happy voters.

With 30 states legalizing the marijuana business, and more likely to join this year, politicians on both sides of the aisle in Congress are confronting an intractable conflict between opposing voter groups over the policy of marijuana decriminalization. 

One thing is for sure, that is that the marijuana Genii is not going back into the bottle.

IRS sec. 280E may have seemed like a good idea at one time.

But that time is long past.

Now, most of the voters want marijuana legal, regulated, and taxed.

Savvy Congresspersons in the upcoming elections will embrace this new paradigm of legalizing marijuana by, at the very least, repealing the outdated federal tax limitations of IRC sec. 280E.   

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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Marijuana Tax Deduction Limitations Should Be Repealed
marijuana, tax, deduction, limitations, pot
Monday, 22 January 2018 07:13 AM
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