No Tax Relief For New Mexico's Marijuana Businesses
Medical cannabis is legal for use in 29 states and the District of Columbia, yet it remains a controlled substance on schedule I of the federal Controlled Substances Act (the "CSA"). Income generated from such sources must be included in gross income when computing a medical marijuana businesses' taxable income, because income from both legal and illegal sources is taxable. Typically, a business can deduct from its gross income all the ordinary and necessary expenses in carrying on the business, but there are certain exceptions to the allowed deductions. One such exception is Section 280E of the Internal Revenue Code (the "IRS Code") which disallows any deduction or credit for any amount paid or incurred in carrying on a business consisting of trafficking schedule I and II controlled substances (within the meaning of the CSA).
The IRS has been applying Section 280E to medical marijuana businesses, establishing that such businesses are trafficking controlled substances as prohibited by the CSA and, thereby, precluded from deducting their ordinary and necessary business expenses. A recent decision from the District Court of New Mexico held, in response to such business' challenges, that the IRS has the authority to investigate and make determinations regarding the legality of the business and apply Section 280E to preclude the business from taking necessary and ordinary business expenses.
