Do States Allow Income Tax Deductions for Marijuana Business Expenses?

Most states and the District of Columbia now allow medical and/or adult recreational use of marijuana. But marijuana growers, distributors, and dispensaries in many of those states still cannot deduct expenses like other business taxpayers.

How Does Federal Law Treat Marijuana Business Deductions?

Federal law continues to treat marijuana as an illegal controlled substance. IRC Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances.

So, taxpayers running a marijuana dispensary in a state where it is legal cannot claim a federal deduction for trade or business expenses, like rent and employee compensation. IRC Sec. 280E bars not only business deductions under IRC Sec. 162, but also deductions for depreciation and charitable contributions.

IRC Sec. 280E does not prohibit a marijuana business from subtracting the cost of goods (COGS) sold from gross income. For example, a marijuana dispensary determining COGS can subtract year-end inventories from current-year purchases.

How Does State Law Treat Marijuana Business Deductions?

The starting point for determining state income tax liability is typically:

• federal taxable income for business taxpayers; or
• federal adjusted gross income for individual taxpayers.

This means taxpayers must include marijuana business expenses in state taxable income, unless the state allows a deduction for those expenses.

A growing number of states are allowing a deduction for marijuana business expenses. Colorado was the first state to allow a deduction beginning with the 2014 tax year. Other states following Colorado’s lead include:

• California for personal income taxpayers beginning with the 2021 tax year, matching a deduction for corporate income taxpayers;
• Hawaii for corporate and personal income taxpayers beginning with the 2016 tax year;
• Louisiana for corporate income taxpayers beginning July 1, 2019;
• Maine for corporate and personal income taxpayers beginning with the 2018 tax year;
• Michigan for corporate and personal income taxpayers beginning with the 2019 tax year;
• Minnesota for corporate and personal income taxpayers beginning with the 2019 tax year;
• Montana for corporate and personal income taxpayers beginning with the 2017 tax year;
• New Mexico for corporate and personal income taxpayers beginning June 29, 2021;
• Oregon for corporate and personal income taxpayers beginning with the 2016 tax year; and
• Vermont for corporate and personal income taxpayers beginning with the 2022 tax year.