Marijuana’s Tax Paradox
by Eva Rosenberg, EA
|Even though I was a California girl, growing up on the streets of Los Angeles in the days of Flower Power, the Free Press, and the Doors’ Light My Fire!,…as it happens, I only inhaled once. Since I don’t smoke, it did nothing for me. But I’ll eat just about anything! Alas, I missed my one big opportunity to try an Alice B. Toklas brownie because I was out sick the day one of my co-workers baked a batch, just for me.||
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Clearly, when it comes to marijuana use, I am not your best example. But the tax issues of this and other evolving laws, like same-sex marriage, have always been a source of fascination to me.
These days, over half the country (32 states + DC) has some level of pot legalization, whether for medical or recreational use or both. Despite the way our founding fathers established states’ rights, when the federal government’s laws conflict with state laws – the Internal Revenue Code will follow federal law for U.S. income tax purposes.
The good news is, buried in the spending bill last December (Public Law No: 113-235), Congress included a provision to end federal drug enforcement raids on medical marijuana establishments. In effect, it legalized medical marijuana on a federal level.
So now we have fully deductible expenses on the state level of 32 states + DC. We have deductible expenses on the federal level for facilities that grow and/or sell only medical marijuana. There are federal non-deductible expenses for facilities that grow and/or sell recreational marijuana. And some businesses cater to both types of customers. Sorting through the morass of laws will be such fun.
Add to this the fact that banks refuse to allow these sellers to accept credit card payments. So we are dealing with cash businesses. We need to teach our clients how to establish some solid accounting systems to separate the fully deductible expenses from those that might be deductible, or not deductible at all on the federal level. They need to know how to set up record-keeping systems that will help prove they do not have unreported income. As well, as protecting these business-owners from employee thefts.
This is an interesting opportunity for accountants and tax professionals to cater to a readily-identifiable niche market that can afford our fees.