O.K., I admit the ruling is not new, but the tax court’s message is an important one as hundreds of dispensaries will open across the country this year–be very careful about accounting for expenses. Our tax code is a jungle rife with danger even for the nimblest of tax attorneys. Dispensaries have learned first hand, the pitfalls of overlooking obscure tax laws like Section 280E, which prohibits anyone from claiming tax deductions for expenses related to the sale of a controlled substance.
The inability to deduct regular and ordinary expenses would destroy almost any businesses. That’s how our tax code is structured. The best-known case of a dispensary waylaid by Section 280E is Harborside Health Center–the largest and most famous dispensary in the world. After getting hit with a multi-million dollar tax bill, Harborside has been fighting to reform the tax code to prevent the type of strategic looting by the federal government that Section 280E currently allows.
Although 280E clearly prohibits deductions for expenses directly related to dispensing marijuana, a U.S. Tax Court ruled in Californians Helping to Alleviate Medical Problems Inc. v. Commissioner (CHAMP) that marijuana dispensaries can deduct expenses related to all activities other than dispensing medical marijuana, such as caregiving, counseling, yoga, massage, etc. As far as rent goes, it depends on what percentage of the building is dedicated to dispensing. In CHAMP, the dispensary also offered caregiving services, which the court ruled were deductible despite Section 280E. In the end, the court allowed the dispensary to deduct all but about 10% of its rent. On the other hand, If a dispensary only sells marijuana it cannot deduct any expenses. The greater the range of services a dispensary offers, the more expenses it can deduct.
For any dispensary owners who are just starting out, proper accounting, and a full suite of goods and services beyond the medical marijuana itself are paramount to running a financially sustainable dispensary. Ultimately, the key is to make all business decisions carefully, and in good faith. We often hear of how Fortune 500 companies exploit tax loopholes, but dispensaries must navigate the tax laws very carefully. As with all businesses associated with marijuana, the bar is often higher when proving good faith, because of the knee-jerk reaction many judges and jurors have toward cannabis. So, don’t be clever or conniving here; just keep proper records, and actually offer your patients goods and services of value beyond the medicine itself. It could reduce you tax burden, and is just plain old good business.