Accounting Services For Small Businesses – The sale of marijuana for medical or recreational purposes is legal in many states. However, it is classified as a Schedule I controlled substance under federal law, and considered illegal for federal income tax purposes. No deduction or credit is allowed for any amount paid during the year in carrying on a trade or business if such trade or business consists of trafficking in controlled sub-stances (IRC §280E). Even though gross income from the sale of marijuana is taxable under federal law, related business deductions are not allowed.
Exception: The only exception to this rule is the deduction for the cost of goods sold. Since the cost of goods sold is taken into consideration in the calculation of gross income, the direct costs of producing or purchasing the marijuana are allowed in calculating taxable income, while operational type expenses are not deductible (CCA 201504011).
Court Case: A California medical-marijuana dispensary deducted business expenses and adjusted for indirect cost of goods sold (COGS) per UNICAP rules for producers. The IRS determined that the taxpayer’s sole trade or business was trafficking in a controlled substance and as a result business expenses are not deductible. The court agreed with the IRS and held that the taxpayer could not deduct the ordinary and necessary business expenses of an illegal trade or business. (Harbor-side Health Center, 151 T.C. No. 11)
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