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Medical marijuana dispensaries face challenges from Fed and IRS

irspotWith the legal U.S. cannabis market expected to reach 2.34 billion this year, use of marijuana continues to expand across the nation. As of today, 20 states and Washington D.C. have passed compassionate use laws, while 13 more have pending legislation to legalize the drug this year. American support has buoyed the state laws as well. According to a CNN/ORC International poll released in January, 55% of Americans support legalizing the drug, the highest percentage ever reported by the survey. In Massachusetts, marijuana policy reformers plan to introduce an initiative on the 2016 ballot to make pot legal for all adults, regulated similarly to alcohol.

However, along with the surge in market value and product use comes the need for a clear understanding about medical marijuana regulations beyond state borders. The U.S. Federal Government still prohibits the use of marijuana for all purposes; the drug remains listed under Schedule 1 of the Controlled Substances Act (the U.S. Federal drug policy regulating the manufacture, importation, possession, use and distribution of certain substances.) Schedule 1 is the strictest of the Act’s categories, reserved for drugs found to have no medical use. Even though proponents of cannabis have been filing petitions to have the drug removed from Schedule 1 status for over 40 years, Congress refuses to re-schedule its classification. As a result, many of the state dispensaries operating around the country have been subject to raids by the Drug Enforcement Administration and the Justice Department.

In addition to their battle with federal authorities, dispensary owners now face additional challenges from the IRS. Federal law requires that state dispensaries pay federal income tax on all business profits (determined by subtracting businesses expenses from gross income.) Doing so is usually not a problem, since filing taxes tends to help dispensaries establish legitimacy for their business. Recently though, the IRS has also begun enforcing a law established in the 1970’s barring tax deductions for business incurred by “drug trafficking organizations.” Since 2008, the IRS has audited and denied many medical marijuana dispensaries based on Section 280E of the IRS Tax Code, originally established to prevent drug dealers from profiting from illegal sales. Now, the IRS is using this law against dispensary owners to halt legal access to medical marijuana.

On the other hand, dispensaries that offer services such as drug education, patient counseling, and other care giving services do have the option to categorize themselves as dual businesses, which allows them to separate sales and dispensary activities related to marijuana from those that are non-drug related. So long as dispensary operators list care giving services as the primary feature of their facility, those primary expenses may be deducted. It’s important for all distributors to have a solid grasp on these laws and if necessary, enlist outside counsel to ensure they are in compliance. The following strategies may be useful for dispensary owners facing challenges associated with Section 280 in their tax filings:

  • Categorize as many costs as possible into Cost of Goods
  • Use dual legal business entities
  • Avoid any references to cannabis in tax returns
  • Demonstrate non-drug related business activity
  • Classify as many staff members as possible into job descriptions that fall outside the realm of drug-related duties

For more guidelines, visit http://280ereform.org/faq/dispensary-faqs/.

About the Author

Ronni Rausch is a Vice President at WGA, and works with a variety of clients, from public entity/not for profit institutions to professional consulting and financial firms. Her goal is always to negotiate the broadest possible programs at the most competitive premiums available for her clients.

617.646.0322 | RRausch@wgains.com | Connect with Ronni on LinkedIn

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