Regardless of whether their activities are legal under state law, drug dealers have to deal with special tax laws designed to discourage their activities. IRC 280E states that any deductions from an illegal drug business are not allowed. The definition of an illegal drug business is defined by the drugs that are deemed illegal by the federal government, not the states. This means that the marijuana dispensaries in Colorado and California must report their marijuana income, but cannot deduct their marijuana expenses.
This rule is all encompassing for expenses related to the illegal drug business, including rent paid for property used in the drug trade, the soil that the drugs are grown in, and even the Ziploc bags the drugs are transported in.
However, there is still hope for all of your druglord clients. The IRS allows drug dealers to take a deduction for the cost of their goods sold. This means the drug dealer can deduct from their income the cost of the drug from their dealer or supplier to reduce some of their taxable income. The IRS even issued guidance, ILM 201504011, to assist drug dealers in trying to determine the cost of their goods sold.
If you are having trouble with the IRS, give our office a call at 816-524-4949 or visit our website at www.Hoorfarlaw.com.