Tag Archive for medical marijuana

IRS and Medical Marijuana Dispensaries – Olive v. Commissioner

August 17, 2012 Marijuana

Dispensary owners now finally have some precedent to follow in arriving at federal taxable income. In Olive v. Comm’r, 139 T.C. No. 2 (8/2/12), Mr. Martin Olive the owner of an operation called the Vapor Room was required to prove among other things that he was entitled to deduct the Vapor Room’s claimed amounts of cost of goods sold (COGS). The Tax Court essentially made the following decisions:

1. The Vapor Room’s cost of goods sold (COGS) was not over stated and in fact the Court decided based on oral testimony that 75.16 % of revenue was a reasonable measure of the Vapor Room’s Cost Of Goods Sold and generally allowed that percentage of sales as COGS offset for both years at issue.

2. Mr. Oliver could not deduct any of the Vapor Room’s ‘expenses’ citing both Internal Revenue Code Section 280(e) and its previous decision in Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 173 (2007) (CHAMPS), holding that medical marijuana was a controlled substance and thus related business ‘expenses’ were not deductible.

3. The accuracy-related penalties imposed by the IRS were essentially upheld but because Code Sec. 280(e) relevant to medical marijuana dispensaries had not yet been decided when Mr. Olive filed his federal income tax returns for 2004 and 2005, the accuracy-related penalty did not apply to the portion of each underpayment that would not have resulted had Martin been allowed to deduct his substantiated expenses.

Basically COGS in accounting standards is considered a ‘revenue offset’ reported as a subtraction from revenue on the ‘income’ portion of an income statement which is separate and distinct from actual ‘expenses.’ Evidently it appears this is where the tax court is choosing to draw the line in applying IRC 280(e). So be sure to understand the distinction between cost of goods sold and expenses when arriving at your taxable income.  COGS will bring down your taxable income and ‘expenses’ will not.

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IRS Implications for Medical Marijuana Dispensaries Update

January 5, 2012 Marijuana

I was at the IRS Practitioner Liaison Meeting yesterday morning in downtown Denver where local IRS officials in positions of authority presented operational updates. In regards to medical marijuana dispensaries Matthew Houtsma, acting Associate Area Council spoke. I found his words intriguingly worth a blog post. This is my interpretation. The notes of the meeting are expected to be published next week and I’ll be sure to post them on this blog as well. The bottom line is that no one at a federal level wants to take a leadership position on the issue of tax deductible expenses for medical marijuana dispensaries in an election year – duh. Besides federal ‘leadership’ in any regards is proving to be an oxymoron. Nevertheless Mr. Houtsma’s candidness proved refreshing and I truly appreciated his knowledge on the topic as well as the time he spent with me conveying it. This is what I learned…

IRS tax cases in Colorado are being referred to associate area council as soon as the IRS examination or audit function learns that the operation under the microscope involves dispensing marijuana. Area council has determined that ‘cost of goods sold’ for medical marijuana dispensaries is a revenue offset and NOT and EXPENSE according to generally accepted accounting practice and is subsequently indeed at least for the time being ALLOWED. In plain terms that means growing and cultivating medical marijuana albeit federally illegal is essentially as far as I can tell NOT an EXPENSE associated with dispensing medical marijuana. It is a revenue offset or ‘cost of goods sold.’ Stripping proprietors of this requires constitutional considerations and again no one at the federal level will presently address the distinction.

The act of taking money and handing a patient marijuana albeit as a ‘medication’ however is evidently indeed representative of ‘narcotic traffic’ making the expenses associated with facilitating that transaction NONDEDUCTIBLE accordiung to the US Justice department. In plain terms that means that for the time being the expenses associated with the employee conducting the transaction of collecting money in exchange for physically handing the patient medical marijuana along with the expenses associated with storage of medical marijuana etc are recognized under IRC 280(e) as narcotic traffic and subsequently NOT deductible.

Basically hairs are being split here because I think the bottom line is that Colorado wants to fly under the radar as much as possible until pusillanimous reprobates at the federal level grow the political kahunas to take a leadership position on the issue. Which really at the end of the day is not that dysfunctional.

In order to remain under the radar as it were the solution for the moment seems to lie in providing multiple services in the same physical location as the area in which the medication or ‘narcotic’ is dispensed. Some folks are providing a wide range of services from holistic medicine to massage therapy. Nevertheless three things became very clear to me today:

1. Simply hanging a shingle in a strip mall to solely sell weed will attract attention, the wrong kind of attention, don’t do it. Be sure to provide periphery services in conjunction with dispensing.

2. The survival strategy is to remain under the radar of a sleepy US attorney general for the time being. In other words if you have the intestinal fortitude to jump into this business don’t try to pull in 7 figures right off the bat. For the time being it seems bigger is not better.

3. IRS Criminal Investigation is in my opinion (even though they don’t use these exact words) profiling and targeting taxpayers that operate medical marijuana dispensaries with cross border operations. So don’t be a wise guy and try to grow in say California and dispense in Colorado. Chances are they already know ALL ABOUT YOU. If you are dispensing in Colorado be sure to cultivate your medicine inside Colorado borders or buy from a wholesaler that cultivates inside Colorado borders.

The next step in my opinion lies in defining exactly what costs fit under the accounting lexicon of ‘costs of goods sold’ and what costs are actual nondeductible expenses associated with ‘narcotics traffic.’ On a personal note it just seems ridiculous to me for a dispensary to incur employee costs, including employment tax liability, but cannot deduct the expense in calculating federal adjusted gross income.

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