This past month Missouri joined the growing number of states that have legalized medical marijuana. This will inevitably lead to a surge of new dispensaries and other marijuana-based businesses opening in Missouri in the coming years. If you are considering open a marijuana-based business, there are some unusual tax pitfalls you need to be aware of.
While medical marijuana is now legal in Missouri, the federal government still classifies it as a Schedule 1 drug. This classification means that the federal government has deemed that it has "no medicinal value" and a "high potential for abuse".
The IRS requires that gross income be reported from whatever source it is derived (Sec. 61), but Sec 280E states that:
"No deduction or credit shall be allowed for any amount paid or insured during the taxable year in carrying on any trade or business if such trade (or the activities which comprise such trade or business) consists of trafficking in controlled substances...which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
In other words, marijuana based businesses are not allowed to deduct necessary expenses such as rent, wages, taxes, advertising, utilities, or any of the other ordinary and necessary business expenses that other types of business are allowed to deduct on the federal tax return. For example, if a dispensary purchased goods for $200 and sold it for $300, the business would be required to report $100 in profit and be taxed on that amount regardless of any other expenses.
This situation can lead to some particularly nasty tax consequences if you form your marijuana based business as an S-Corporation, which requires reasonable wages to be paid to the owners. If you pay yourself wages, those can't be deducted on your business return, but if you don't pay yourself wages the IRS can fine you and determine a wage amount for you.
The National Cannabis Association found that the effective tax rate for a marijuana based business is 55%, versus 30% for a non-marijuana based business with similar income and expenses.
While some pitfalls are unavoidable due to the current discrepancies in state and federal law, proper planning can reduce the impact and make you aware of what to expect.