Taxing (legal) Marijunana Sales

[Red Cedar PM]

Now that selling weed is legal in some states, Congress may need to pass legislation to allow deductions against income for that business activity.

This does raise an interesting question. While deductions are not allowed, isn't Cost of Goods Sold an exclusion from income and not a deduction? If so, could a marijuana business get around this (in part) by absorbing as many costs into inventory as possible and thus maximize the allowed COGS exclusion?

http://taxfoundation.org/blog/tax-code- ... uana-sales

[Pottapaug1938]

Somehow, I don't see Congress allowing tax deductions for something which is still illegal under Federal law. Something has to give.

[Arthur Rubin]

There was a discussion of this recently in a tax newsletter I subscribe to, describing the differences between Federal (tax) law and California law.

COGS (but no expenses) are allowed on the Federal return; however, if the allocation you discuss were done, it would be illegal income on the part of the suppliers, and their expenses would not be allowable on their Federal returns. Under California law, if it is an illegal (under California law) operation, not even COGS is allowed. If legal, most regular expenses are allowed for California.

[Burnaby49]

In Canada illegal operations like grow-ops are still legally required to file tax returns. You can guess how many do. However, if they did, they would be allowed the same expenses they would claim if entirely legit. Because of taxpayer confidentiality the CRA can't turn them in to police, and no, there is no under the table agreement to do so. The CRA benefits the other way by going after taxpayers who are convicted of profitable criminal offenses. The CRA can use the information collected by the police as part of the assessment. Grow-ops are a prime example of this.

When I started with the Canada Revenue Agency way back in the early 1970s an example everybody used on this was a now long-forgotten 1950's prostitution case where the lady in question had been convicted of prostitution, been reassessed by the income tax department, and appealed her assessment to the Tax Review Board (the Tax Court predecessor). Great fun snickering over her claimed deductions but she was taken seriously by the Board.

[Arthur Rubin]

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.

All other illegal businesses in the US are allowed (some) expenses.