How to Calculate the Taxable Income of a Medical Marijuana Dispensary Business Under Section 280E of the Internal Revenue Code
In the U.S. Tax Court case of Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue, 128 T.C. No. 14 (2007), the issue before the court was whether the Petitioner (CHAMP) could deduct ordinary expenses of $213,000 incurred in its medical marijuana business, a business that was legal under California law. The Tax Court held that Internal Revenue Code Section 280E prohibited the deductions. Here are some relevant statements made by the Court in its opinion:
Accrual method taxpayers such as petitioner may generally deduct the ordinary and necessary expenses incurred in carrying on a trade or business. See sec. 162(a).
Items specified in section 162(a) are allowed as deductions, subject to exceptions listed in section 261. See sec. 161. Section 261 provides that“no deduction shall in any case be allowed in respect of the items specified in this part.”
The phrase “this part” refers to part IX of subchapter B of chapter 1, entitled “Items NotDeductible”. “Expenditures in Connection With the Illegal Sale of Drugs” is an item specified in part IX. Section 280E provides:
“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 (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
In the context of section 280E, marijuana is a schedule I controlled substance. See, e.g., Sundel v. Commissioner, T.C. Memo. 1998-78, affd. without published opinion 201 F.3d 428(1st Cir. 1999). Such is so even when the marijuana is medical marijuana recommended by a physician as appropriate to benefit the health of the user.
As a result of the CHAMP case and Section 280E of the Internal Revenue Code, it is very easy to calculate the taxable income of a business that’s only business is growing or selling medical marijuana. Here’s how it works:
Gross Income – Cost of Goods Sold = Taxable Income