U.S. Tax Court Sets the Tone for Medical Marijuana Businesses

In a recent decision, the Tax Court denied all business-expense deductions related to the sale of marijuana under IRC section 280E (Laurel Alterman and William A. Gibson, TC Memo 2018-83).  Ms. Alterman operated a medical marijuana business that sold merchandise such as pipes, papers, and other related items, in addition to products containing marijuana. For years, the income and expenses from the business were reported on a Schedule C with the couple’s jointly filed individual tax return. While legal in Colorado under specific arrangements, the sale and use of medical marijuana is illegal under federal law. As a result, the Tax Court denied all the business-expense deductions connected to the sale of marijuana under IRC Sec. 280E, that prohibits any deductions paid or incurred in carrying on a business that traffics controlled substances. The business deductions related to the non-marijuana merchandise were also denied because the Court determined this was not a separate business. If it were a separate business based on the facts and circumstances, the non-marijuana expenses would be deductible.

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