Nevada Marijuana Businesses and Federal Income Tax Challenges Regarding Business Expense Deductions In 2001, the…
Tax Court Continues To Disallow Tax Deductions For Marijuana Businesses
Expert IRS Tax Attorneys Discuss Tax Court Decisions on Medical Cannabis Dispensaries
On February 17, 2021, The United States Tax Court issued an opinion affirming all of its prior decisions disallowing business expense deductions taken by state licensed marijuana businesses on their Federal income tax returns. San Jose Wellness v. Commissioner, 156 T.C. No. 4.
SJW Must Pay $4.2 million in Back Taxes & Penalties After Losing a Case in U.S. Tax Court
Over the course of a few years, the IRS audited San Jose Wellness (SJW), a medical cannabis dispensary licensed by the City of San Jose, California. For tax years 2010 through 2015, IRS disallowed all the dispensary’s business expense deductions, leading to notices of deficiency asserting over $4 million in Federal income tax.
Marijuana Businesses Can’t Claim Tax Deductions For Depreciation Under Section 280E Of The IRS Code
In numerous prior opinions, the Tax Court has unequivocally stated that marijuana businesses may not deduct their business expenses. This is because Congress specifically enacted Internal Revenue Code Section 280E to prevent businesses trafficking in controlled substances from taking any deduction or credit. Specifically, Section 280E states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business . . . consists of trafficking in controlled substances . . . which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” In fact, the Tax Court has specifically held that Section 280E is not limited to deductions claimed under Section 162 but applies to prohibit all deductions. Northern California Small Business Assistants Inc. v. Commissioner, 153 T.C No. 4 (2019).
Before the Tax Court, SJW attempted to argue two points: (1) its deduction for depreciation should be allowed because it is not “paid or incurred during the taxable year” and (2) its charitable contributions should be allowed because they were not made in carrying on a trade or business. The Tax Court disagreed with both arguments.
Citing prior case law, the Court opined that depreciation is a cost “presently incurred,” and as a result, it is paid or incurred during the taxable year. Depreciation is therefore, not deductible under Section 280E.
Section 280E Applies To Charitable Contributions As a Matter Of Policy
Regarding SJW’s charitable contribution deductions, the Tax Court found that given the benefits to corporations of making charitable gifts, there was no reason to conclude that SJW’s gifts were separate from its business activities. As such, SJW’s charitable contribution deductions were part of carrying on its trade or business and therefore disallowed under Section 280E.
Since 2015, the Tax Court has consistently issued opinions disallowing deductions under Section 280E to state licensed marijuana businesses. Because these opinions had been issued by the time SJW filed its 2015 tax return, the Tax Court upheld IRS’ 20% accuracy related stating: “SJW has offered little evidence to suggest that it considered these authorities — or took any other action — to determine its proper tax liability.”
If you own a business selling, growing, or producing marijuana, you need to work with an experienced marijuana industry tax lawyer to understand your tax rights and responsibilities. If your business is audited you could face substantial tax deficiencies and penalties.
Contact a Professional IRS Tax Law Firm in Arizona & Nevada
Silver Law PLC operates in Arizona and Nevada and all of its lawyers are former trial attorneys for the IRS. A tax lawyer from our team can help you understand how the complex Tax Code applies to your marijuana business operations. We’ll help you ensure that you are meeting your obligations. If you have been audited or are facing collections, we are also in a position to help you navigate that process. We can either find ways to bring down your tax debt or can negotiate a settlement for you. Contact Silver Law PLC today to talk with a tax lawyer and learn more.
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