What Does The Government Spend Weed Tax Money On

A growing number of states have legalized the production and sale of marijuana, either for medical or recreational purposes, or both. However, marijuana remains illegal under federal law. It is classified as a Schedule I drug under the federal Controlled Substances Act [21 U.South.C. Sec. 812], and that distinction can brand a big tax difference — for marijuana sellers and buyers.

Marijuana Sellers

There is no question that income from selling marijuana is taxable nether federal law. The tax police broadly taxes income "from whatsoever source derived," whether that source is legal or illegal [IRC Sec. 61(a); see James v. U.S., 366 U.Southward. 213 (1961)].

However, while marijuana sellers clearly bear the brunt of federal taxation, they won't necessarily reap the benefits of federal tax law rules.

Code Sec. 280E, enacted in the 1980s, specifically provides that "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in conveying on a trade or business if such trade or business concern … consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Human activity) …." Thus, while most businesses tin deduct all their "ordinary and necessary" expenses, that's not the case for marijuana businesses.

Marijuana sellers can accept write-offs against gross receipts for the cost of goods sold (COGS). The IRS acknowledges that Sec. 280E does not disallow a marijuana business's adjustments to gross receipts for COGS, but those write-offs are more limited than for other businesses [IRS Principal Counsel Memorandum, 201504011]. Nether longstanding rules, direct costs (eastward.chiliad., purchase costs for a reseller or direct textile and labor costs for a producer) are treated equally COGS [IRC Sec. 471]. In addition, under electric current compatible capitalization (UNICAP) rules, COGS also includes certain indirect costs, such equally treatment expenses and payroll costs. However, those additional write-offs for indirect costs are not allowed for marijuana sellers. Co-ordinate to the IRS, the UNICAP rules, enacted after Code Sec. 280E, did not change the character of indirect expenses from nondeductible to deductible.

Thus, while marijuana sellers can merits COGS write-off for direct expenses, such every bit the invoice price of marijuana purchased for a reseller, or the costs of seeds or plants for a producer, the taxation law currently disallows deduction for a whole host of ordinary and necessary expenses, such as rent, utilities, marketing and wage payments.

On the other manus, marijuana sellers can't skimp on those expenses. For example, courts have held that an "illegal" marijuana concern is still bailiwick to the legal minimum wage and overtime requirements of the federal Off-white Labor Standards Act (FLSA) [come across, east.g., Kenney five. Herliz TCS, Inc., 284 F. Supp. 1186 (D. CO 2018)]. Moreover, it is articulate that marijuana sellers must comply with the federal revenue enhancement law requirements for withholding and paying payroll taxes, even though the underlying employee wage payments and the associated taxation payments are nondeductible for income tax purposes.

Marijuana Buyers

Current federal revenue enhancement law allows a deduction for unreimbursed medical expenses to the extent the full of such expenses exceeds ten percent of adjusted gross income [IRC Sec. 231]. As a general rule, a deduction is allowed for the cost of a medicine or drug if the medicine or drug is prescribed by a doctor [IRC 213(d)(3)]. However, medical marijuana is a different story.

A revenue ruling dating back to 1997, shortly after California became the kickoff state to legalize medical marijuana, provides that an corporeality paid to obtain a controlled substance such as marijuana is not a deductible medical expense — even if land constabulary requires and the taxpayer obtains a prescription from a doc [Rev. Rul. 97-9, 1997-1 CB 77].

Under IRS regulations, the term "medicine and drugs" includes simply items that are "legally procured" [Treas. Reg. Sec. 1.213-1(eastward)(2)] — and that means "legally procured" under federal law. In the ruling, the taxpayer's purchase and use of medical marijuana was permitted under state law. However, nevertheless state law, the IRS ruled that a controlled substance, such as marijuana, obtained in violation of the federal Controlled Substance Act, is not "legally procured" for purposes of the medical expense deduction rules.

Health Savings and Reimbursement Accounts

Health flexible spending accounts (FSAs), wellness savings accounts (HSAs), medical savings accounts (MSAs) and employer-sponsored health reimbursement arrangements (HRAs) allow for the payment of qualifying medical expenses with tax-free dollars. However, the definitions of qualifying medical expenses for purposes of these accounts parallel the definition for medical expense deduction purposes. Consequently, the costs of medical marijuana will not qualify for tax-advantaged handling under these accounts.

Technically, there's naught to prevent a taxpayer from paying for medical marijuana with funds in an HSA or MSA (although some accounts use restricted debit cards or credit cards that would foreclose such payments). However, amounts used for medical marijuana will be treated as nonqualifying distributions that are subject to tax and a 20 percent punishment [IRC Sec. 220(f); 223(f)].

On the other hand, the rules are different for HRAs and FSAs. Distributions from those types of plans must be restricted to qualifying medical expenses – or the plan will exist disqualified [Discover 2002-45, 2002-two CB 93, Prop. Treas. Reg. Sec. one.125-5(k) (1)].

Key point: Given the growing tendency toward legalization of marijuana at the land level, federal lawmakers take introduced proposals to follow suit at the federal level. About recently, for instance, Representative Earl Blumenauer (D-OR) introduced the legislation to remove marijuana from the schedule of controlled substance under the Controlled Substances Act [Regulate Marijuana Similar Alcohol Deed, H.R. 420, one/9/2019]. All the same, to date, those proposals accept gone upwardly in smoke.

The Intuit® Accountants team provides ProConnect™ Taxation, Lacerte® Taxation, ProSeries® Tax, and addition software and services to enable workflow for its customers. Visit united states of america at https://proconnect.intuit.com, or follow united states on Twitter @IntuitAccts.

Source: https://proconnect.intuit.com/taxprocenter/tax-law-and-news/legal-marijuana-and-the-federal-tax-law/

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