Ask a Weed Lawyer: Do I Have to Pay Taxes on Pot Plants?
The man always wants your money, son.
John Bussman is a criminal defense attorney in Orange County, California. He is an expert on marijuana law, a member of the NORML Legal Committee, and a longtime supporter of drug policy reform.
Q: If I grow weed for a legal dispensary, will I owe taxes for my plants?
Let me rephrase the question this way: If there’s money out there, will the government find a way to take it? Of course it will. In addition to any state and local taxes, the IRS will absolutely ream you if you are engaged in the business of selling legal cannabis.
In 1982, the federal government was knee-deep in a massive campaign to disrupt Colombian drug cartels. Part of that effort including going after the money. By cracking down on money laundering and tax evasion, the feds were better able to seize the cartels’ assets through forfeiture actions. To this end, Congress adopted section 280E of the tax code. That law essentially said that people who are engaged in the business of selling Schedule I drugs (including marijuana) may not deduct operating expenses on their tax returns. This meant that drug dealers would owe income taxes on their gross revenues, not just on their net profits.
For the non-accountants, think of it this way: A roofing business brings in $1,000, but it spends $900 on advertising, salaries, insurance, etc. The roofer has a profit of $100, so he owes a fraction of that $100 profit to the IRS.
If a cannabusiness earns $1,000, but spends $900 on advertising, salaries, insurance, etc., it will owe taxes on the full $1,000, even though it only turned a $100 profit. If the business’s tax bill exceeds its profits, then the business is operating in the red and will inevitably go bankrupt.
The law is struggling to catch up to the realities of today’s emerging legal marijuana industry.
Of course, nobody invests their time, effort, and skill into a business with the intent of losing money each month. Unfortunately, federal tax laws currently put cannabusinesses into a position where they must either 1) commit tax fraud, 2) get “creative”, or 3) go broke. It’s no surprise that many dispensary owners have chosen option #2.
While section 280E of the tax code prohibits marijuana businesses from deducting their operating expenses, it allows them to deduct the “cost of goods sold.” In the example from above, now imagine a situation where a legal dispensary brings in $1,000 by selling marijuana, but it spent $700 buying the weed from a grower, and it spent another $200 on salaries, rent, and advertising, leaving a profit of $100. Since the dispensary paid a $700 “cost” for the merchandise that it sold, it may deduct that amount from its gross revenue at tax time. Now it only owes federal income taxes on $300 rather than $1,000. The game then becomes trying to classify as many expenses as possible under “cost of goods sold,” rather than “operating expenses.” That’s where a skilled accountant steps in.
Image via Grassland
A grower might be able to legally reduce his tax bill by classifying nearly all of his expenses as “costs of goods sold," arguing that those expenses were incurred for the purposes of production rather than normal operating expenses. Let’s say a grower sells his crop for $1,000. He spent $900 on water, electricity, nutrients, and growing equipment. He may have a strong case that all of those expenses collectively constitute the costs of the goods that he sold. If he keeps good records and follows the advice of a qualified accountant, he might only owe federal income taxes on a fraction of his $100 profit rather than on his full $1,000 revenue.
This is just one example of where the law is struggling to catch up to the realities of today’s emerging legal marijuana industry. Congress has debated revamping the tax code and replacing 280E with a high federal excise tax on marijuana. It hasn’t done so yet. The current system practically requires dispensaries to launder money, hide cash, and file false tax returns. It’s time for Congress to adopt some meaningful reforms and stop turning business owners into criminals.