Tag Archive for Expense
If you are in the business of dispensing marijuana according to the United States Office of Homeland Security you are selling an illegal drug not a medicine like many individual states believe. Nevertheless Internal Revenue Code IRC 280(E) states that the expenses associated with selling illegal drugs are not deductible from revenue when calculating federal income for federal income tax purposes. This means that the usual and customary business expenses associated with your business model cannot be deducted on your federal income tax return, be it a 1040 Schedule C, 1120, 1120S, or 1065 form, etc.
IRC 280(E) clear stipulates, “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.”
As I write this one large California dispensary has been issued a Statutory Notices of Deficiency from the IRS in excess of one million dollars. Others are sure to follow and perhaps bankruptcy to ensue. Here in Colorado or any state in which marijuana is considered a medicine if you are capable of staying compliant with the state statutes regarding the matter and wish to stay compliant with the IRS it is my personal opinion that you should report all revenue derived from selling marijuana to the IRS as income and pay federal income tax on all revenue. Also be sure to pay federal employment tax for your employees (IRS Forms 941, 940, 945) but do NOT deduct the employment tax liability as an expense at the federal level. It too is not a deductible expense. Report NO EXPENSES WHATSOEVER $0.00.
It is widely believed, perhaps wrongly so, that legitimate dispensaries should be safe passing costs on to customers provided local authorities are successful in weeding out (as it were) non-compliant dispensaries and creating a level playing field in the local communities. In the states where marijuana dispensing is a legal activity at the state level I am currently of the opinion, perhaps wrongly so, that business expenses associated with selling marijuana would be deductible on the state income tax return for the states in which the business operates. This is relatively new territory though so anyone with more insight is welcome to accordingly respond. If I were to sign a tax return of this nature I would start by asking the state department of revenue in which the business operates to provide direction on the matter from their perspective.
What I do know as a matter of fact is that engaging a strategy of cost segregation specifically separating out the peripheral or indirect costs of selling marijuana from the direct costs of selling marijuana and claiming those indirect costs to be deductible at the federal level is a violation of IRC 280(E). Don’t do it.
I’ve been getting asked this question quite a bit so I put it directly to the IRS. My guess is that I wasn’t the only one who asked because today the Internal Revenue Service issued guidance designed to clarify the tax treatment of cell phones.
The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.
The Notice provides guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require record keeping of business use in order to receive this tax-free treatment.
The IRS additionally announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.
Under the guidance, when employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome record keeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable. Details are in the memo and in Notice 2011-72
Tax Information