A look at 208E and cost of goods sold
In recent years, a number of states have legalized marijuana to one degree or another. Some states have legalized marijuana for recreational purposes, while others are allowing marijuana possession and growing. Some states have legalized marijuana only for medicinal purposes. And while these states have legislated to decriminalize marijuana to varying levels, depending on the state, the fact remains that marijuana continues to be illegal under federal law.
In the wake of this relaxation in marijuana prohibition laws, businesses (often termed dispensaries) whose main product is marijuana are springing up in states where marijuana has become legal. These businesses are accounting for and reporting the results of their operations just like any other for-profit business, with gross receipts, cost of goods sold (COGS), and other deductions. While these states have no issues with the way these dispensaries are being run and are paying their state income taxes, the problem, or pitfall, is the existing federal prohibition. Because of this, the way financial information is reported for federal tax purposes by a business that is trafficking in a controlled substance is very different than for state purposes.
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