Marijuana dispensaries generally cannot deduct business expenses due to IRC 280E. However, the CHAMP court held that section 280E does not preclude a marijuana dispensary from deducting expenses attributable to a trade or business that does not traffic in controlled substances simply because the dispensary also is involved in the trafficking in controlled substances. In response, many marijauan dispensaries facing a notice of deficiency disallowing deductions under IRC 280E have argued that they have two separate trades and businesses, just like the marijuana dispensary in CHAMP.
In light of the CHAMP decision, it is certainly possible that the sale of products that don’t contain marijuana can be deductible if those sales are part of a separate trade or business. However, in practice the IRS has disallowed deductions for those sales and courts have reasoned that such sales are activities incident to the business of trafficking in a controlled substance and thus part of a single business whose deductions are non-deductible under IRC 280E.
Guest post by Jin Kim. Attorney Jin Kim practices marijuana tax law in California. She represents cannabis businesses with state and federal tax debt against the IRS and state tax agencies.