Illegal but Taxable: Medical Marijuana Farming
by Terri Eyden on
By Teresa Ambord, Correspondent
When state and federal laws collide, something's got to give. Under federal law, income from growing medical marijuana is ill-gotten gain. It is, however, taxable, as is all income. In some states, growing cannabis is legal for medical purposes and in Colorado, it's legal – period. That means it can be a source of income and therefore taxable. But that doesn't mean cannabis farmers can claim production costs on their federal return, without admitting to criminal activity.
Somehow, claiming expenses of growing an illegal substance is worse than reporting the income, said Forbes magazine. Of course, there are some expenses that are always going to be illegal, added Forbes, like the cost of hiring a hit man to bump off the competition. But medical marijuana is subject to an addition to the Tax Code known as Section 280E, which goes back to the 1980s. Under that section, there simply are no legitimate expenses that are claimable.
Here's a snippet:
No deduction or credit 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 or the law of any State in which such trade or business is conducted.
One way medical marijuana growers get around the restriction on claiming expenses is to have another business on the same property, says Forbes, and push the expenses to that business. The example they cite is a care-giving business which occupies most of the premises. That way the property rent – or most of it – is claimed for that business rather than the cannabis production.
Forbes also says these growers need to keep immaculate records, even more so than other businesses. They need to be clear and transparent, because if there's any appearance of evading taxes, the proprietors may be found guilty of tax evasion. And that carries a possible five years in prison.
The federal and state laws regarding medical marijuana just don't line up, but this could be easily fixed if there was a motivation. Instead, the industry, which is legal, gets pushed underground, according to Marijuana Business Daily.
Other Opinions on Taxing Criminal Activity
In France, a well-known heroin dealer is currently behind bars for his criminal drug trade. That doesn't stop French authorities from reminding him he also happens to owe 80,000 euros in tax for heroin income. In US currency, that's the equivalent of about $110,000. While France has no problem jailing a drug dealer and taxing his "ill-gotten gain," they have agreed to lighten his tax burden by crediting him for expenses. His attorney, Samra Boudiba, said they don't seem to know how to handle the taxation of income from illegal trade. "In a sense, one gets the impression that they are acknowledging the legality of this (drug) dealing as they consider it to be a small business."
For example, his major supplier is in Belgium, which means there's significant travel expense. For that, French authorities are giving him a credit equal to $2,750 per year. In addition, they're allowing him credit against his sales for the amount of heroin he may have used himself. Forbes quoted French authorities, saying, "Your personal consumption has been evaluated at four grammes per day, which can be deducted from your sales."
Of course, Forbes says, France is pretty new at this issue of taxing income, even if it is for illegal activity. While the United States has been doing it for a long time, going back at least to the Al Capone days, France only started taxing criminals in 2009. So far, they're much more lenient than the IRS, but that might change in time as the constant search for new revenue grows even faster than the demand for drugs.
You may like these other stories...
London Stock Exchange switches auditing to EYThe London Stock Exchange will drop PwC as its auditor and replace it with EY after completion of the audit for the year ending March 2014, Harriet Agnew of the Financial Times...
With tax season in the past, it's time to think about the tax implications of decisions your clients may be making about their homes in 2014. The rules are complicated and because of the huge amounts involved, the...
IRS revokes group’s tax exemption over anti-Clinton statementsGregory Korte of the USA Today reported on Monday that the IRS has revoked the tax-exempt status of a conservative-aligned charity, the Patrick Henry Center...
Upcoming CPE Webinars
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.
This material focuses on the principles of accounting for non-profit organizations’ expenses. It will include discussions of functional expense categories, accounting for functional expenses and allocations of joint costs.