A recent U.S. Tax Court Case captioned “Raymond Chico and Ruby Chico v. Commissioner”, Respondent upheld the use of a very simple tax accounting tool by the IRS in determining the tax liability of a cannabis-related business.
The IRS used the ‘gross receipts method’ to add up all receipts from all sources and determined that it all was taxable income. The Tax Court determined that the IRS could collect all applicable penalties including the accuracy-related penalties.
A recent U.S. Tax Court case challenged the ability of the Internal Revenue Service to deny all tax deductions as invalid for a cannabis-related business. The business “Northern California Small Business Assistants Inc.” was a legal dispensary in California.
The Tax Court denied all of the arguments of the business as invalid and upheld the position of the IRS in full. In addition, the case is significant in that it determines that not only are ‘ordinary and necessary business expenses’ (known as Section 162 expenses) invalid, but all deductions and tax credits paid are also invalid.
The case was decided in late October 2019 and the IRS position remains the law today:
“You operated a medical marijuana dispensary. Thus, it is determined
that your business consists of trafficking in marijuana, a controlled
substance within the meaning of schedule I or II of the controlled
substance [sic] Act. Accordingly, you are subject to the limitations of
IRC 280E, which disallows all deductions or credits paid or incurred
during the taxable year in carrying on a trade or business that consists
or [sic] trafficking in controlled substance [sic].”