The IRS has ruled that dispensaries of medicinal marijuana cannot deduct standard business expenses such as payroll, security, or rent. In a ruling against Harborside Health Center of Oakland California, one of the nation’s largest medical marijuana dispensaries and one that is considered a model for the industry, the IRS held that the company owed $2.5 million in back taxes for the years 2007 and 2008.
The basis for the IRS ruling was Section 280E of the Internal Revenue Code, which was originally enacted to target drug kingpins and cartels, and bans any tax deductions related to “trafficking in controlled substances.” In a series of letters released by the IRS to several United States Representatives who had expressed an interest in the matter, the IRS stated:
“Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term ‘controlled substances’ has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act. . . . Because neither section 280E nor the Controlled Substances Act makes exception for medically necessary marijuana, we lack the authority to publish the guidance that you request.”
The IRS is now auditing more than a dozen other medical marijuana dispensaries in California, and banks are refusing to do business with dispensaries for fear federal regulators will prosecute them. Sixteen states and the District of Columbia have passed laws allowing medical use of marijuana. Florida is not currently one of those states. However, the situation described above serves as an excellent example of the importance of planning around the tax code when starting a new business. Oftentimes, people only look at the state issues that will affect their business and neglect to consider federal tax planning. The Internal Revenue Code operates independently of state or local law, and compliance with one does not automatically assume compliance with the other.
Also highlighted by this story is the fact that tax issues can often arise years after the initial returns are filed. Given the retroactive application of the tax code, coupled with the resulting penalties and interest, it is very easy for even the smallest of errors to evolve into very costly problems. Consulting with an experienced Florida tax attorney before you start your business can help you avoid tax issues in the future and it is highly likely that the cost to implement an effective tax strategy now will be far less than the cost that will be necessary to remediate mistakes as they become evident.
If you are starting a new Florida business and would like to consult with a professional who can help you understand all the legal consequences of your decisions, contact an Attorney in Jacksonville who has knowledge and experience working with the tax code.