Q&A WITH SEAN REED
Medical marijuana law passage poses several tax concerns
Q: Can Oklahomans with a qualifying medical condition, a medical marijuana card issued by the state and a doctor’s prescription deduct the cost of the marijuana as a medical expense?
A: No. You can’t take a tax deduction or use an FSA or HSA card to purchase the medical marijuana. The federal government still considers marijuana illegal, as a schedule 1 narcotic under the Controlled Substances Act of 1970.
Q: What concerns should people who are considering investing in a medical marijuana business have?
A: Potential investors should speak with both an attorney and an accountant knowledgeable in taxation of these businesses in general and Oklahoma law specifically. An obscure section of the Internal Revenue Code, section 280E, prohibits “drug dealers” from taking business deductions. State licenses for medical marijuana businesses are subject to this law, and in turn can deduct only the cost of the marijuana. Ordinary and necessary business expenses, such as rent, payroll and advertising are eliminated or greatly reduced.
Q: Why does the federal government limit these deductions for licensed, legal businesses?
A: In short, section 280E of the Internal Revenue Code came about in 1982, during the Reagan era war on drugs. Congress couldn’t conceive of any medical use of marijuana. The first medical marijuana laws in America came about in California in 1986.
Q: Are you saying that an investor can’t make money in medical marijuana?
A: On the contrary, you can do quite well. However, federal income tax becomes the largest expense of such a business, and without proper structure we have seen businesses struggle and then leave investors with large unexpected personal income tax bills and no cash to pay the tax.
Q: How does passage of SQ 788 impact Oklahoma state taxes?
A: Currently, Oklahoma state tax returns must mirror federal returns, so unless the Legislature acts, dispensaries and growers will be taxed at a higher effective tax rate because only the cost of the marijuana can be deducted in calculating their taxable income. Some states, such as California, Colorado, Oregon and Rhode Island allow an addback of the lost 280E deductions in calculating the state tax.