Ninth Circuit: Legal or Not, Marijuana Facility Cannot Deduct its Expenses

Legalized medicinal marijuana is yesterdays’ news; legal recreational marijuana is the way of the world now, and with each passing year, additional states are considering the legalize-and-tax regime first instituted by Colorado and Washington. While state law is becoming more and more accepting of the idea of free-market marijuana, however, a decades-old provision of the federal tax code remains firmly in place, threatening to administer a painful amount of tax on marijuana facilities, and serving as a greater barrier to entry into the industry than any outdated notion of moral or ethical impropriety.

The IRS has been wielding a little known Code section — Section 280E, to be exact — to wage war on medicinal and recreational marijuana facilities. Section 280E provides that no deduction — other than the cost to purchase or grow the marijuana inventory, or Cost of Goods Sold (COGS) — shall be allowed for any amount incurred in a business that consists of “trafficking in controlled substances.” And while marijuana may have been legalized in several states for medicinal or recreational purposes, because the drug finds itself on Schedule I of the Controlled Substances Act, the IRS has the ammunition necessary to deny all non-COGS deductions – things like rent, utilities, wages, supplies, etc… – of any facility that buys and sells the drug.