Medical marijuana and taxes are a 'growing concern' in U.S.

Medical marijuana dispensaries and grower businesses face many concerns when it comes to filing federal income taxes, according to tax attorney Venar Ayar. Dispensary businesses are “nearly six times” more likely to be audited by the IRS than U.S. businesses in general. 

According to federal law, marijuana dispensaries and growers are trafficking an illegal substance. Even though individual states may have legalized medical or recreational marijuana, it’s still against the law at the federal level.

“As a federal agency, the IRS views marijuana as an illegal controlled substance, and has a special part of the tax code, Section 280E, that governs how taxes are assessed, making it impossible for businesses selling marijuana to deduct the normal business expenses, like rent, payroll, and marketing costs,” said Ayar, the principal and founding tax attorney for Ayar Law Group. “Left with only one allowed deduction, the cost of the marijuana itself, dispensaries have a tax burden averaging 70 percent of profits, and, as cash-based businesses, they have caught the eye of the IRS, making them a growing target for audits.”

Medical marijuana dispensaries and growers also have to be concerned with sales tax and payroll taxes for employees, even if paid in cash, said Ayar. While most prescription drugs are not taxed in Michigan, the law is unclear when it comes to marijuana, he indicated.

According to Ayar, there are “a lot of unique risks associated with the medical marijuana industry, and before the industry can reach its full potential, there will have to be some considerable tax reform nationwide.” When it comes to taxes issues, medical marijuana dispensaries and grower businesses can benefit from the following simple lessons, he said.

1. File taxes honestly and promptly. If you fail to file, the IRS will “file one for you, and you'll likely receive a huge tax bill,” according to Ayar.

2. Set up your company properly to limit personal risk and financial responsibility. Upon start up, set up your business as a C corporation, according to Ayar. Even though pass-through taxation of S corporations, partnerships and LLC’s can be desirable and can often lead to lower tax bills, the risky nature of the marijuana industry makes the C corp. form the best option for tax purposes, because shareholders are not personally liable for taxes in the event of an audit.

3. In the event of an audit, do not speak to an IRS tax examiner without legal representation. If a grower or dispensary has not established a relationship with a marijuana business tax attorney prior to opening their doors, hire a tax attorney with experience representing marijuana businesses at IRS audits. “Even answering simple questions without a qualified attorney, such as your line of business, can lead to mistakes that could result in a big tax bill or jail time,” said Ayar.