Generally a business can deduct normal business expenses such as rent, payroll, etc. However, the IRS is using an obscure section of the code passed during the Reagan Administration as part of the “War on Drugs” to deny normal business expenses to medical marijuana-related businesses.
Since cannabis (marijuana) falls under the Controlled Substances Act, businesses marketing medical marijuana are subject to IRC Section 280E and are not allowed to deduct business expenses.
The IRS recently used this code section to deny business expenses to the nation’s largest medical marijuana dispensers, Harborside Health Center, based in Oakland, CA. As result the firm was hit with an adjustment of $2.5 million for the 2007 and 2008 tax years.
There has been some Congressional support to change the law. Representative Pete Stark, a California Democrat has introduced legislation (the Small Business Equity Tax Act) that would allow medical marijuana dispensaries to deduct normal business expenses.
Harborside was probably picked by the IRS for audit since they are the largest dispenser in the industry. In the meantime, while this shakes itself out, it has sent chills though the medical marijuana industry and could be the swan song for the industry.