Marijuana and Federal Tax Law: In Brief (CRS Report for Congress)
| Release Date |
May 26, 2015 |
| Report Number |
R44056 |
| Report Type |
Report |
| Authors |
Erika K. Lunder, Legislative Attorney |
| Source Agency |
Congressional Research Service |
Summary:
As an increasing number of states have permitted the use of marijuana for medical and recreational uses, questions have arisen about the federal income tax consequences for businesses that sell marijuana and their buyers.
There is no question that income from selling marijuana is taxable to the seller, regardless of whether such sale is legal or not under federal or state law. While such income is taxable, the seller will be limited in its ability to deduct business expenses and claim tax credits. This is because Section 280E of the Internal Revenue Code (IRC) disallows a deduction or credit for amounts incurred in carrying on a trade or business that consists of trafficking in a controlled substance (within schedule I and II of the Controlled Substances Act, CSA) and which is prohibited by federal or state law. Because marijuana is listed on Schedule 1 of the CSA, a significant impact of this provision is that marijuana sellers may not deduct their business expenses. Notably, Section 280E does not apply to the cost of goods sold (COGS).
In the 114th Congress, the Small Business Tax Equity Act of 2015 (S. 987 and H.R. 1855) would amend Section 280E so that its prohibition would not apply to businesses that sold marijuana so long as the sales were conducted in compliance with state law.
Marijuana sellers must also comply with federal tax laws regarding the withholding and payment of payroll taxes. One issue that has garnered attention relates to the fact that some marijuana sellers operate in cash due to impediments with opening bank accounts. This causes problems under the federal tax code because it requires that employers pay payroll taxes electronically and subjects them to a monetary penalty if failing to do so. Thus, marijuana sellers who pay payroll taxes in cash may be penalized up to 10% of the taxes paid.
Marijuana buyers, meanwhile, may not deduct the amounts spent on marijuana as a medical expense or use funds in tax-advantaged accounts (such as flexible spending accounts (FSAs), health reimbursement accounts (HRAs), or health savings accounts (HSAs)) to pay for medical marijuana.
