Howto:Being Medically Legal and Paying Taxes

[dongle69]

i understand these are just rough numbers for ease math, but how exactly do you show your cost of nutes or electricity? Wouldn't you have to provide receipts for the nutes/equipment and electricity bills if they audit you? Do you actually put itemized lists of what you claim on schedule C or just generalize it all to "Nutrients" and a cost?

I use Quickbooks and TurboTax.
Schedule c has all of my itemized deductions.
I split it up into equipment (permanent things like reservoirs and light hoods) and supplies (replaceable items like nutrients, light bulbs, etc).
I also get partial deductions for use of my grow space and utility bills.
Receipts should be kept but are only needed for an audit.

 

[dongle69]

EDIT: Even though medical marijuana falls under the definition of a prescription drug in IRS publication 502, it also falls under the definition of a controlled substance in the same document, which makes it non deductible on a federal level.

Can you claim medical marijuana as a health expense?

If you get receipts from the club that you buy from you can.
I think it has to be over $300/500 - I don't remember the exact amount.

 

[Jeff Lebowski]

If you get receipts from the club that you buy from you can.
I think it has to be over $300/500 - I don't remember the exact amount.

Per purchase or in total?

 

[dongle69]

EDIT: Even though medical marijuana falls under the definition of a prescription drug in IRS publication 502, it also falls under the definition of a controlled substance in the same document, which makes it non deductible on a federal level.

Per purchase or in total?

It was total...BUT...
I just saw in my tax info that it changed this recent tax year.
As of now:

If you itemize your deductions rather than claiming the standard deduction, you can deduct medical expenses. However, they must add up to more than 7.5% of your AGI (adjusted gross income) to be deductible.
This includes:

• medical insurance, including Medicare B and Medicare D premiums
• prescription drugs (insert weed here)
• medical procedures
• mileage to and from medical facilities (every little bit helps!)

Quite a change from previous years but some people buy a lot of weed, so it still helps.

 

[Pythagllio]

i understand these are just rough numbers for ease math, but how exactly do you show your cost of nutes or electricity? Wouldn't you have to provide receipts for the nutes/equipment and electricity bills if they audit you? Do you actually put itemized lists of what you claim on schedule C or just generalize it all to "Nutrients" and a cost?

That's the invoice he gives to the club, not the tax return. Rather than selling pot, OP is selling nutes, electricity, the required equipment and his service. Yes, he'd need the receipts in case of audit if he wants to deduct his expenses. He gets a 1099 from the club and those things are basic, just the amount paid, and the information of the entity paid.

 

[Blue Dot]

I also get partial deductions for use of my grow space and utility bills.

A fews years ago a tax preparer told me that if I wanted to deduct a portion of my living space as a business deduction that although I could do it she said it throws up a flag at the tax board.

If your space is less then 25% of your living space then is a red flag really worth the minor deduction you'd get because the dedection is actually only a percentage of the space so the total deduction for that space is minimal.

 

[Blue Dot]

I'm pretty sure that with a fed 1099 you have to report "ill gotten gains" but the reverse is not true that you then also get to write off the expenses associated with generating those ill gotten gains.

All the 1099 is going to say is that you were paid a sum of money. No need to use the 'ill got gains' line. Invoice the dispensary for the components involved and add a consultation or delivery fee on top of that to add up to gross revenue, and put it all on schedule C.

Sample invoice;

Electricty: $500
Nutrients: $500
Equipment depreciation charge: $500
Consultation fee: $500

Invoice total: $2000
1099-MISC = $2000

The first 3 are equal to your actual expenses, and are legitimately deductible. You pay tax on your profit of $500. This also allows the dispensary owner to deduct these costs legally, since he isn't trying to deduct the purchase price of cannabis, which is not an allowable deduction.

Get a real tax pro on your side. They are worth their weight in gold.

Yeah, pythagllio I screwed up on this one.

For some reason I thought you were talking about your 1040 and not a 1099.

What you said about the 1099 is true but when it comes to your 1040 you're going to need to use the "ill gotten gains" line because under fed law income from this doesn't fit in anywhere else on the 1040.

You can't just throw it in your sched c like in your example because even though the self employment may be legal for the state it's not legal under fed law so you can't use the states legality as a means to avoid the ill gotten gains line. That sched c on a 1040 is for itemized deductions that are legal under fed law, not just state law.

In other words, in order to use a 1040 sched c the itemized deductions that you put there have to be legal deductions from legal activity under both state and fed law.

 

[dongle69]

A fews years ago a tax preparer told me that if I wanted to deduct a portion of my living space as a business deduction that although I could do it she said it throws up a flag at the tax board.

I have never heard that.
Nearly every home based business in the U.S. claims that deduction.
TurboTax is very good at showing you what gives a higher audit risk and that is never on the list.
From the literature:
Will taking the home office deduction trigger an audit? The answer is generally "no." Changes in the rules in the late 1990s made it easier for people who work out of their homes to qualify for these write-offs. So if you qualify, by all means, take it.

Schedule C in and of itself makes one at higher risk for an audit, not the home office (work space) deduction itself.
Claiming a loss for too many years is also a red flag.

More from the literature:
The main test for the home office is "Exclusive Use" of a certain area of your home. Ideally, you know you want your own little office anyway, but what if you don't have a spare room in your home? It can be a part of a room, and that part of the room does not necessarily need to be partitioned off. However, it must be a definable space that is used both exclusively and regularly for your business.

In other words, it is the exact deduction you would use for a grow room.
Always have proof of your deductions and you have nothing to worry about.

More info here:
http://turbotax.intuit.com/tax-tools/tax-tips/small-business/5663.html

 

[Pythagllio]

What you said about the 1099 is true but when it comes to your 1040 you're going to need to use the "ill gotten gains" line because under fed law income from this doesn't fit in anywhere else on the 1040.

Absolute nonsense. There is nothing illegal about selling nutes, power, equipment or services. It is also the correct way to invoice and be in compliance with SB420. No, SB420 has nothing to do with the IRS but we want to be in compliance with all laws as best we can, and the strategies dovetail nicely.

If you insist on invoicing for pot sales you fill out a schedule C, and you use the 5th amendment to avoid describing your activity. The trouble with that strategy comes from deducting your expenses. If you're an outdoor grower with minimal expenses that would be the path of least resistance.

 

[surgexvb]

Absolute nonsense. There is nothing illegal about selling nutes, power, equipment or services. It is also the correct way to invoice and be in compliance with SB420. No, SB420 has nothing to do with the IRS but we want to be in compliance with all laws as best we can, and the strategies dovetail nicely.

If you insist on invoicing for pot sales you fill out a schedule C, and you use the 5th amendment to avoid describing your activity. The trouble with that strategy comes from deducting your expenses. If you're an outdoor grower with minimal expenses that would be the path of least resistance.

i dont understand this. so you invoice the club for your expenses and services, not for weed. They give you a 1099misc copy to document the transaction that says they paid you sum and then send you on your way. Does the 1099misc have to be filed with the IRS everytime you get paid, or just once at tax time? Is the club responsible for filing the 1099misc with th IRS?

Then, on your 1040, what line should this income be placed on, is it considered business income or loss?

I use Quickbooks and TurboTax.
Schedule c has all of my itemized deductions.
I split it up into equipment (permanent things like reservoirs and light hoods) and supplies (replaceable items like nutrients, light bulbs, etc).
I also get partial deductions for use of my grow space and utility bills.
Receipts should be kept but are only needed for an audit.

On schedule C, I am confused about how to deduct expenses, because if you deduct nutes, electricity, lights, etc, then it seems its a dead giveaway what you are doing. so you don't itemize, you just put a number where it says "Supplies" on schedule C. where do you put your costs for things like lights and reservoirs?

thanks for all the help!

 

[dongle69]

On schedule C, I am confused about how to deduct expenses, because if you deduct nutes, electricity, lights, etc, then it seems its a dead giveaway what you are doing. so you don't itemize, you just put a number where it says "Supplies" on schedule C. where do you put your costs for things like lights and reservoirs?

Schedule C has an Asset Entry Worksheet, a section 179 expense report, and a form 4562 Depreciation and Amortization, among others, where all of my equipment that will be around for a while (trays, tables, etc) is itemized.
The replaceable items can go under "supplies" on the form (nutrients, etc).
You don't have to know any of this stuff if you have good tax software, though.
It will just ask you questions and fill it all in for you.
I do itemize everything (supplies included) in Quickbooks as well.
As for the dead giveaway, the IRS is concerned that the forms are correct.
They are not deciphering equipment lists to see who grows weed.
I could be growing anything.
The more legit you make yourself, the less trouble you can get in.
Happy gardening!

 

[krunchbubble]

i know for a fact that if your paying taxes in any way for medical marijuana and get busted, they will still charge you for tax evasion!
a good friend of mine was paying in the neighborhood of 300k in taxes a year and got busted with 100+ lights. he got charged only with tax evasion, didnt get charged for cultivation or anything like that and got 2 years federal time....

 

[krunchbubble]

a greedy bastard? you dont have the slightest clue, you shouldnt comment about people when you dont have any idea. the 50+ patients who received there meds every month for free would disagree......

 

[krunchbubble]

he paid taxes thinking that everything was legal through prop 215. everything that was grown was contracted through the third floor in oakland, except for the product that was given away to patients, which was 10+ lb's per month. he even hired the patients to trim, so they can have a little extra income, instead of there small ssi checks. i should also mention that he sponsored huge thanksgiving and Christmas feasts for homeless people, 300-400 people per dinner.
but it comes down to medical marijuana is in no way legal federally and that is who you pay your taxes to. so, paying taxes for something illegal constitutes tax evasion. no matter how protected you think you think you are with prop 215, your not. it dont matter that you have 6 plants or follow your counties guidlines, its still illegal to pay taxes for medical marijuana.

 

[krunchbubble]

nope, im sure that's larry...

 

[Pythagllio]

i dont understand this. so you invoice the club for your expenses and services, not for weed. They give you a 1099misc copy to document the transaction that says they paid you sum and then send you on your way. Does the 1099misc have to be filed with the IRS everytime you get paid, or just once at tax time? Is the club responsible for filing the 1099misc with th IRS?

Then, on your 1040, what line should this income be placed on, is it considered business income or loss?

Line 21, it's the bottom line number from sched C. dongle69 described it pretty well below the post I'm quoting.

The 1099-misc is filed with the IRS by the payor, in this case the club. There's no detail, just a sum of money paid and to whom it was paid. You're supposed to receive a copy, but that's just FYI you've been reported as being paid money to the IRS. Here's a link to a 1099-misc so you can see how simple it is.

http://www.ecfa.org/Images/Content/Form1099-MISC2007-72.jpg

On schedule C, I am confused about how to deduct expenses, because if you deduct nutes, electricity, lights, etc, then it seems its a dead giveaway what you are doing. so you don't itemize, you just put a number where it says "Supplies" on schedule C. where do you put your costs for things like lights and reservoirs?

thanks for all the help!

I'd actually want it to be a 'dead giveaway' if I ever got charged with tax evasion. But not so much of a dead giveaway that the investigation starts at IRS HQ, that's why I'd avoid the 'ill got gains' line like the plague.

i know for a fact that if your paying taxes in any way for medical marijuana and get busted, they will still charge you for tax evasion!
a good friend of mine was paying in the neighborhood of 300k in taxes a year and got busted with 100+ lights. he got charged only with tax evasion, didnt get charged for cultivation or anything like that and got 2 years federal time....

If this isn't the spun from whole cloth total bullshit it appears to be on its face, your friend was playing games. Paying only part of your taxes is just as bad as paying them all. His getting busted may have triggered the audit, but it was what he left off of his 1040 that got him nailed.

Short sighted people have all sorts of excuses for not paying their taxes. In reality, a person that makes 100k per year and doesn't file is forking out a lot more in opportunity costs than in the taxes paid. No opportunity to set up a qualified retirement account, no documentable income to demonstrate creditworthiness, etc.

so, paying taxes for something illegal constitutes tax evasion.

Now that is total bullshit.

 

[Blue Dot]

Absolute nonsense. There is nothing illegal about selling nutes, power, equipment or services. It is also the correct way to invoice and be in compliance with SB420. No, SB420 has nothing to do with the IRS but we want to be in compliance with all laws as best we can, and the strategies dovetail nicely.

If you insist on invoicing for pot sales you fill out a schedule C, and you use the 5th amendment to avoid describing your activity. The trouble with that strategy comes from deducting your expenses. If you're an outdoor grower with minimal expenses that would be the path of least resistance.

That's like taking the depreciation on a getaway vehicle use in the comission of a bank robbery.

Yes, it is indeed illegal federally to sell nutes, power and equipment if it was used in the comission of a federal crime. It doesn't matter on a 1040 that it was also used in the commison of a state act that was legal. the 1040 only cares about fed law. This is one case where there is indeed a supremecy clause.

 

[dongle69]

I would be interested to see some cases where someone got in trouble for selling nutrients or paying their taxes.
Links?

 

[Pythagllio]

That's like taking the depreciation on a getaway vehicle use in the comission of a bank robbery.

Blah, blah, blah says the ignorant Blue Dot. Below find a link to the Supreme Court case which shows the above is perfectly legit so that you may cease being ignorant wrt this particular subject unless you choose otherwise, which I'm sure that you will. Laugh all you want, you're wrong. The expenses for operating a getaway car in the course of a bank robbery would in fact be deductible since its a standard expense in the ordinary course of the business for bank robbers. Whether legal or not items required to grow cannabis are legitimate deductions for purposes of paying income tax so the point is moot wrt our disagreement of whether selling these things are legal though I maintain that it is. Your entire argument for using the ill got gains line for reporting this income is one of form over substance. While the IRS might be able to argue that the form was filled out incorrectly, if the correct tax is paid it really doesn't matter at the end of the day, there is no tax evasion.

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=383&invol=687

We start with the proposition that the federal income tax is a tax on net income, not a sanction against wrongdoing. That principle has been firmly imbedded in the tax statute from the beginning. One familiar facet of the principle is the truism that the statute does not concern itself with the lawfulness of the income that it taxes. Income from a criminal enterprise is taxed at a rate no higher and no lower than income from more conventional sources. "[T]he fact that a business is unlawful [does not] exempt it from paying the taxes that if lawful it would have to pay." United States v. Sullivan, 274 U.S. 259, 263 . See James v. United States, 366 U.S. 213 .

With respect to deductions, the basic rule, with only a few limited and well-defined exceptions, is the same. During the Senate debate in 1913 on the bill that became the first modern income tax law, amendments were rejected that would have limited deductions for losses to those incurred in a "legitimate" or "lawful" trade or business. Senator Williams, who was in charge of the bill, stated on the floor of the Senate that

"[T]he object of this bill is to tax a man's net income; that is to say, what he has at the end of the year after deducting from his receipts his expenditures or losses. It is not to reform men's moral characters; that is not the object of the bill at all. [383 U.S. 687, 692] The tax is not levied for the purpose of restraining people from betting on horse races or upon `futures,' but the tax is framed for the purpose of making a man pay upon his net income, his actual profit during the year. The law does not care where he got it from, so far as the tax is concerned, although the law may very properly care in another way." 50 Cong. Rec. 3849. 9

The application of this principle is reflected in several decisions of this Court. As recently as Commissioner v. Sullivan, 356 U.S. 27 , we sustained the allowance of a deduction for rent and wages paid by the operators of a gambling enterprise, even though both the business itself and the specific rent and wage payments there in question were illegal under state law. In rejecting the Commissioner's contention that the illegality of the enterprise required disallowance of the deduction, we held that, were we to "enforce as federal policy the rule espoused by the Commissioner in this case, we would come close to making this type of business taxable on the basis of its gross receipts, while all other business would be taxable on the basis of net income. If that choice is to be made, Congress should do it."

 

[Blowstrees]

I have a question. I'm a legal caregiver/patient in my state however in our laws it states that we are not entitled to profit from growing just entitled to the cost we had in producing the meds. I dont think we can charge for a "service" either.. its supposed to be viewed as "kindness" thing to do for someone with illness.

Sounds like this really is more for the legal scene in Cali...but was wondering if I could get any opinions claiming costs associated with growing for my 5 patients..??


Here is the text of the law.

http://www.rilin.state.ri.us/BillText/BillText09/SenateText09/S0185.pdf