In a recent case, the U.S. Tax Court ruled against Laurel Alterman and Altermeds LLC. They found that Non-marijuana merchandise business expense deductions for taxpayers that own a medical marijuana business were not allowed. Finding an economic interrelationship between selling non-marijuana merchandise and selling marijuana merchandise, the court found that tax code Section 280E, denies all deductions for amounts paid in carrying on a business dealing with trafficking in controlled substances. The court denied additional allowances other than amounts conceded for cost of goods sold calculations.
Startup costs are often much lower for infused companies vs. cultivators and retailers, making it easier to turn a profit. The initial cost of the equipment includes:
*A CO2 weed extraction machine will cost approximately $150,000 to $450,000 depending on productivity.
A rotary evaporator and centrifudge will cost $30,000 to $100,00
Additional costs include but aren’t limited to buildings, licensing, or the infrastructure and hourly wages for technicians that will be needed to operate that equipment. And, if you are not growing your own product of course you must factor in the cost of the raw materials (trim) that varies by state. Check out DiscountPharms.com to monitor it.
Marijuana Business Expense Deductions
Section 162 allows a deduction for the expenses of carrying on a business. Sections 167 and 179 allow deductions for depreciation of assets used in a business.
Section 280E, however, provides that no deduction is allowed for an amount paid or incurred in carrying on a business if the business consists of trafficking in controlled substances.
Although Alterman and Gibson concede that Altermeds, LLC, trafficked in controlled substances, they contend that it had a separate business of selling non-marijuana merchandise and that the business- expense deductions of this separate business are not disallowed by section 280E. Whether selling non-marijuana merchandise was a separate business from selling marijuana merchandise is an issue of fact that depends on, among other things, the degree of economic interrelationship between the two activities.
Under the circumstances, it was held that selling non-marijuana merchandise was not separate from the business of selling marijuana merchandise. First, Altermeds, LLC, derived almost all of its revenue from marijuana merchandise. Second, the types of non-marijuana products that it sold complemented its efforts to sell marijuana. Altermeds, LLC, had only one unitary business, selling marijuana.
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Help with Marijuana Business Tax Preparation
If you have a State legal marijuana business, you have special federal tax consequences that need to be considered. Please contact our office if you would like to schedule a consultation to discuss your personal tax situation.