Although Maryland legalized the sale of marijuana for medical use, it remains illegal under federal law. Nevertheless, you are still obligated to pay federal income tax on the sale of marijuana as the Internal Revenue Code (IRC) does not treat illegal source income differently from legal source income. Both sources of income are taxable.
Unfortunately, IRC section 280E does not allow deductions to businesses that traffic in controlled substances. Marijuana is considered a controlled substance under federal law. Consequently, ordinary and necessary business expenses like salaries, rent or telephone, that are otherwise legal expenses, are disallowed if they are incurred by a medical marijuana business.
Section 280E does not disallow deductions attributable to a taxpayer’s separate and lawful trade or business. So, if you have a medical facility that provides counseling and also dispenses medical marijuana, the portion of the deductions attributable to the counseling services would be deductible. Section 280E also does not prohibit medical marijuana businesses from adjusting their gross receipts for cost of goods sold.
Medical marijuana licensees should contact a tax professional to determine whether they have tax-deductible expenses attributable to a distinct, separate business and to determine what expenses can be deducted as cost of goods sold.