The IRS takes an aggressive approach toward medical marijuana dispensaries. Rather than permit these state-licensed dispensaries to deduct ordinary and necessary business expenses, the IRS often disallows business deductions pursuant to IRC 280E. The section that causes medical marijuana dispensaries so much financial pain is brief and worth quoting:
No deduction… 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.
IRC 280E
Why Courts Consider Medical Marijuana A Controlled Substance For Purposes of IRC 280E
Unfortunately for medical marijuana dispensaries, or any cannabis business that involves the buying and selling of marijuana, tax courts have made short work of whether marijuana is a ‘controlled substance’ for purposes of IRC 280E. Even though the sale of medical marijuana is legal under state law, according to tax courts and the Ninth Circuit, “the only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ If Congress now thinks that the policy embodied in 280E is unwise as applicable to medical marijuana sold in conformance with state law, it can change the statute. We may not.” (Olive v. Commissioner). Accordingly, as long as marijuana is a controlled substance during the applicable tax years, even medical marijuana will be considered a controlled substance for purposes of IRC 280E.