Corporate Close-Up: Maine Allows Medical Marijuana Caregivers and Dispensaries to Deduct Business Expenses

Maine made significant amendments to its medical marijuana law, including providing a deduction for medical marijuana-related business expenses otherwise prohibited by federal tax law, when the Maine Legislature voted July 9 to override Gov. Paul LePage's (R) veto of L.D. 1539.

This is the second time the Legislature has overridden LePage's veto of legislation regulating marijuana usage. As Aaron Nicodemus reported May 3 in the Daily Tax Report: State (subscription required), the Legislature voted May 2 to enact a bill regulating and taxing recreational marijuana sales, notwithstanding the governor's objections.

The medical marijuana legislation allows doctors to recommend medical marijuana to patients for any medical reason, increases the number of medical dispensary licenses that may be granted, and authorizes municipal regulation of certain medical marijuana businesses, particularly local retail operations. The Medical Marijuana Caregivers of Maine Trade Association supported the legislation because it also permits caregivers who grow and administer marijuana to private patients to expand their businesses by increasing the number of marijuana plants and seedlings a caregiver may cultivate and removing the limit on the number of assistants a caregiver may hire. The legislation also authorizes caregivers to operate one retail store and to organize their businesses as any type of legal business entity under Maine law.

Of course, operating a business includes tax compliance obligations. A caregiver may receive and must report as income reasonable monetary compensation for costs associated with cultivating marijuana plants or assisting patients with the medical use of marijuana. Additionally, a caregiver may transfer up to 30 percent of the mature marijuana plants grown by the caregiver over the course of a calendar year to another caregiver or dispensary in wholesale transactions for reasonable compensation.

For federal income tax purposes, a caregiver generally may not reduce income by expenses associated with operating a medical marijuana business. Federal law classifies marijuana as a Schedule I controlled substance, and I.R.C. § 280E prohibits any deduction or credit for any amount paid or incurred in connection with carrying on a trade or business that consists of trafficking in controlled substances.

As a result of the legislation, Maine decouples from I.R.C. § 280E. For taxable years beginning on or after Jan. 1, 2018, Maine provides a subtraction from federal adjusted gross income for individuals, and from federal taxable income for other taxpayers, equal to the amount of the deduction not allowed under I.R.C. § 280E for expenses related to operating a business as a registered caregiver or registered dispensary.

Maine's subtraction is similar to modifications in other states that permit medical and recreational use of marijuana. Since 2014, Colorado allows taxpayers licensed under the Colorado Medical Marijuana Code or the Colorado Retail Marijuana Code to deduct any expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed by I.R.C. § 280E because marijuana is a controlled substance under federal law. Taxpayers in Oregon also may subtract from federal taxable income amounts that are incurred for the authorized production, processing, or sale of marijuana items and that would have been deductible for federal income tax purposes but for I.R.C. § 280E.

Other testimony before the Maine Legislature in support of L.D. 1539 concluded the legislation would allow caregivers "to operate viable tax paying businesses." The differences between federal and state tax law, however, highlight the complexities of operating a business involving a federal controlled substance faced not only by the business owners but also by tax and accounting professionals offering services to those businesses. CPAs who are thinking of taking on marijuana industry clients may find the American Institute of Certified Public Accountants' published comprehensive guidance useful.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Has your state's accountancy board weighed in on issues a CPA should consider before providing services to a legal marijuana business?

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