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This week we have covered an IRS ruling against one of California’s biggest medical marijuana dispensaries which resulted in a $2 million tax debt from disallowed payroll taxes and other deductions. The CEO of Oakland’s Harborside Medical Center said that the IRS’ logic in disallowing his business deductions did not make sense in light of an allowed deduction for the actual purchase of pot.

“The IRS allows me to deduct my cost of purchasing cannabis, which is the controlled substance they say is illegal,” Haborside director Steve DeAngelo said. “But I can’t deduct my payroll or my rent? That, clearly, defies logic and common sense.”

A related issue to disallowed deductions is the problem that tax penalties can create for business owners. Penalties for failing to pay payroll taxes can be steep and result in a doubling of an IRS tax debt. An experienced California tax law attorney can help with penalty abatement and work towards the IRS lowering or forgiving penalties.

There are some congressional efforts underway to make sure that California medical dispensaries are not burdened by surprise disallowed business deductions and penalties. One bill is called the Small Business Tax Equity Act which authorizes marijuana dispensaries to take all regular business deductions.

“You’d think that a time of record budget deficits that the IRS would be happy that a legal business is doing the right thing and paying its taxes,” a sponsor of the bill said. “Instead, the IRS seems intent on destroying a successful and legal business that creates jobs and strengthens our economy.”

One Oakland tax attorney said that he has fought the IRS in a case similar to the Harborside case. The result was a tax court judge declaring that the IRS was not entitled to the $426,000 in back taxes and penalties that it sought. The judge also allowed the marijuana dispensary in that case to take business deductions.

Source: MSNBC, “IRS ruling strikes fear in medical marijuana industry,” Al Olson, Oct. 5, 2011