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Understanding IRS Deductions for Controlled Substances Business Expenses

This article explores IRS regulations concerning tax deductions for businesses involved in controlled substances, focusing on notable cases such as IRS vs. C.H.A.M.P. (2007) and IRS vs. Vapor Room (2012). It details permissible deductions, such as "counseling and caregiving services" and the cost of goods sold (COGS), while stressing the importance of maintaining sufficient records to substantiate deductions. The takeaway emphasizes that businesses should allocate maximum expenses to COGS and keep activities unrelated to sales separate for better tax compliance.

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Understanding IRS Deductions for Controlled Substances Business Expenses

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  1. 280E

  2. Gross receipts - Costs/expenses = Taxable Income

  3. “No deduction or credit shall be allowed for any amount paid or incurred … in carrying on any trade or business… 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.”

  4. 2007: IRS vs. C.H.A.M.P.

  5. 2007: IRS vs. C.H.A.M.P. Allowed deductions for: 1. “counseling and caregiving services”

  6. 2007: IRS vs. C.H.A.M.P. Allowed deductions for: 1. “counseling and caregiving services” 2. Cost of goods sold

  7. 2012: IRS vs. Vapor Room

  8. 2012: IRS vs. Vapor Room Allowed deductions for cost of goods sold (75%)

  9. 2012: IRS vs. Vapor Room Allowed deductions for cost of goods sold (75%) Denied deductions for other expenses for lack of sufficient records to substantiate them.

  10. Deductible: 1. Cost of goods sold

  11. Deductible: Cost of goods sold “Counseling & caregiver services”

  12. Deductible: Cost of goods sold “Counseling & caregiver services” Other services unrelated to mj sales

  13. Lesson:

  14. Lesson: Devote maximum expenses to COGS, activities separate from sales

  15. Lesson: Devote maximum expenses to COGS, activities separate from sales Devote minimum expenses to activities related to sales

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