The IRS Just Warned Taxpayers to Never Take This Deduction
An official for the tax agency is clarifying some confusion over what you can and can't write off.
From donations you've given to charity to work dinners, there are a number of personal expenses you can list as deductions on your federal tax return. These write-offs lower your taxable income, which will then reduce the amount of money you could end up owing the Internal Revenue Service (IRS) after you file. But you still have to be careful about the deductions you take. After all, taking deductions you're not meant to could flag you for an audit, and if the IRS determines a deliberate error, you could be subject to hefty penalties or even charged with tax evasion.With that in mind, it's essential to make sure you are only deducting what the tax agency allows you to. Read on to find out what the IRS is warning you not to write off on your taxes.
There has been recent confusion over whether medical marijuana purchases are tax-deductible.
Erin Collins, the National Taxpayer Advocate with the IRS, recently caused confusion among taxpayers about whether or not medical marijuana purchases are deductible on your federal taxes, Marijuana Moment reported on Feb. 14. During a Feb. 10 interview with C-SPAN's Washington Journal, a Nevada-based resident asked Collins why he couldn't find an option to deduct cannabis purchases while using the tax service provider TurboTax.
Buying marijuana is legal in some states—like Nevada, where it's permitted both medically and recreationally—because of state laws. But because it is not legal federally, the IRS official said she'd "plead ignorance on the marijuana" question unless the caller was talking about a "medical deduction."
"If it is a medical expense, and then you have an option on your Schedule A, you could potentially put it there," Collins said at the time.
But the IRS now says you can't take a deduction for medical marijuana.
Marijuana users might be disappointed to learn that purchasing the substance is not tax-deductible, even if it was bought for a medical purpose. In a statement to Marijuana Moment, Collins explained that she had responded that it was "potentially" possible to take medical marijuana as a deduction. But she confirmed to the news outlet that this is not the case after all.
"I had not previously studied the federal tax treatment of marijuana, and I speculated that marijuana might 'potentially' be deductible as a medical expense in certain circumstances," she said. "After the program, I checked the law. To clarify, medical marijuana is not tax deductible for federal purposes under current rules."
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Marijuana still has to be included by some taxpayers on their returns.
This doesn't necessarily mean marijuana won't come up at all while doing your taxes. According to the IRS, any business that operates as a marijuana dispensary in compliance with state laws still has the same tax filing obligations as any other business—despite the business being considered an "illegal activity" by the federal government.
"Yes. Income from any source is taxable," the tax agency explains on its website. "The Supreme Court has long held that income from illegal sources is taxable and is not exempt from taxation. More recently, federal courts have consistently upheld Internal Revenue Service determinations that state compliant marijuana dispensaries have taxable income."
More than 35 states have legalized marijuana in some way.
According to the IRS, 36 states and Washington, D.C., have legalized marijuana for recreational purchases, medical use, or both, as of Sept. 2021. But the tax agency says it does not have the authority to adopt policies that authorize marijuana-related deductions while the substance remains illegal under federal law, per Marijuana Moment.
"It's tricky from a business perspective, because even though states are legalizing marijuana and treating its sale as a legal business enterprise, it's still considered a Schedule 1 controlled substance under federal law," IRS Commissioner De Lon Harris said in a September statement. "While IRS Code Section 280E is clear that all the deductions and credits aren't allowed for an illegal business, there's a caveat: Marijuana business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn't deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses, to name a few."