While states continue to push toward legalization, marijuana remains classified as a controlled substance under federal law. Federal law still largely views such businesses as trafficking in controlled substances and the IRS denies deductions for marijuana businesses. Tax deductions help businesses reduce their income tax and, without those deductions, marijuana businesses pay more in tax.
On November 29, 2018, the Tax Court decided Patients Mutual Assistance Collective Corporation v. Commissioner and held that, despite Patients Mutual Assistance Collective Corp. (d.b.a. Harborside) operating legally as a cannabis dispensary under state law and having a small non-marijuana line of business, it was not entitled to deductions because federal law it is treated as a drug trafficker. The Tax Court also held that Harborside could not capitalize its indirect costs into its inventory because capitalizing expenses that would not otherwise be deductible is expressly prohibited under I.R.C. § 263A, and drug traffickers do not get deductions. Note that direct cost of goods sold is a reduction (and not a deduction) against computing gross income, and therefore permitted and not affected by the Tax Court’s ruling.