Revenooer Rants: Ninth Circuit slams pot dispensary on deductions
July 15, 2015
The Ninth Circuit Court of Appeals recently hammered the marijuana industry (once again) in holding that a taxpayer was precluded by the Internal Revenue Code from deducting any expenses related to its legal marijuana dispensary business.
Generally, a business may deduct from its gross income all of the ordinary and necessary expenses paid or incurred in carrying out its trade or business.
But a specific provision of the Code precludes a taxpayer from deducting if the trade or business in question consists of trafficking in controlled substances.
In a 2007 Tax Court case, a taxpayer was found to have two business purposes: that of providing caregiving services to individuals, and secondarily to provide folks with medical marijuana under the California Compassionate Use Act of '96.
In this case, the Court allowed deduction of expenses attributable to its counseling and caregiving services, thus denying the IRS assertion that there was only a single unified business activity (trafficking in marijuana) and thus all expenses should be disallowed.
But in the recent Olive v. Comm decision, IRS wasn't buying (nor was the Ninth Circuit Court) the taxpayer's argument that the IRC prohibition of deductions applies only to illegal trafficking, and thus was inapplicable to this taxpayer's business, which was a legitimate operation under state law.
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The taxpayer urged that Congress could not have intended for medical marijuana dispensaries, now legal in many states, to be subject to the nondeductibility rule.
And as Congress contemplates its usual August hiatus, taxpayers wonder what fate will befall late 2014 "extender" provisions of the law which won't apply to 2015 unless action is taken. Among the more important provisions whose 2015 fate is still unlearned are:
• Deduction for state and local sales taxes.
• Deduction for mortgage insurance premiums treated as qualified interest.
• Exclusion from gross income of up to $2 million of discharged principal residence indebtedness.
• Deduction of up to $500,000 in cost of certain otherwise depreciable business property, and applicability of 50% "bonus depreciation."
• Tax free distributions for charitable purposes from IRAs of taxpayers age 70-1/2 or older.
CONSULT YOUR TAX ADVISER – This article contains general information about various tax matters. You should consult your tax advisor concerning the implications to your own particular situation. Jeff Quinn is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He may be reached at 775-831-7288, and welcomes comments at firstname.lastname@example.org.