410 ILCS 130, otherwise known as the Compassionate Use of Medical Cannabis Pilot Program Act, went into effect at the beginning of this year. Scheduled to expire on January 1, 2o18, the program is meant to allow the medical use of marijuana in the state of Illinois. Illinois is one of 20 states to have a medical cannabis program. Some of those states have decriminalized recreational use as well. Illinois’s program comes with specific and steep regulations for growers and dispensers and while these may have made Illinois medical marijuana infrastructure slow to develop, the largest complication comes from the fact that whatever Illinois law may say, marijuana is still a Schedule I controlled substance under the federal Controlled Substances Act. This situation leads to confusion for those trying to grow and sell cannabis, the patients intending to use it, and also for the tax professionals and accountants looking to assist these businesses.
The Department of Justice has said, essentially, that it’s not going to go after marijuana in states that have legalized it (medical or recreational), so long as those laws conform to a few requirements like ensuring marijuana is not used by minors. Illinois’s program meets those requirements. Congress has gone one step further recently and, in the recesses of a giant spending bill, included a prohibition on the DOJ using such funds to pursue marijuana in states where it’s legal. The strangeness of Congress instructing a federal agency not to enforce a law that Congress itself passed aside, this should provide relative confidence to the Illinois patient looking to make use of medical marijuana.
For businesses and the professionals interested in helping them, unfortunately, things are less clear. Again, the DOJ shouldn’t be breaking down the doors of an Illinois dispensary, but because growing and selling marijuana is still illegal by federal law, other issues arise. Banks, for example, are reluctant to handle accounts for marijuana businesses. These companies also run into problems when it comes time to file their taxes. The Internal Revenue Code prohibits a company from declaring as deductions any expenses incurred in the performance of illegal activity. In other words, if a business buys a piece of equipment, they can write that off as an expense and deduct it from their taxes. But if the business is a marijuana dispensary, their work is technically illegal by federal law and thus they cannot deduct the expense. The end result is that taxes on cannabis businesses can be much higher than on other companies and that could make operation fiscally unfeasible. There’s some room for creativity here, for example selling more than just marijuana and attributing expenses to that part of the business, but the situation remains far from ideal.
For tax professionals, the chief problem is what happens when you’re assisting your clients to break the law. The Illinois State Bar Association recently released their opinion on how attorneys can navigate the law. They were unfortunately unable to give much concrete advice. The Department of Justice shouldn’t be the immediate concern since they have been instructed first by the executive and now the legislative branches of the federal government to, as it were, leave this one alone, but professional regulatory agencies haven’t been told the same. The ISBA opinion explained that there’s no problem in an attorney giving advice to a client on the legality or illegality of possible actions. Explaining the law is safe. When a lawyer gets involved transactionally, preparing an operating agreement for example, then the attorney is assisting their client to break federal law and the ARDC (The Attorney Regulation and Disciplinary Commission of the Illinois Supreme Court) could arguably go after that attorney’s ability to practice law in Illinois.
The issue comes down to marijuana being classified a Schedule I controlled substance. If federal law was changed to leave the matter of the states, the situation would be clearer. As it stands, things are hazy and look likely to remain that way for the foreseeable future.
Horowitz Law Offices assists clients with their state, federal and international tax concerns. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org