Ominous Sign: Harborside Health Loses Battle With IRS Over Business Deductions

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The medical marijuana industry is getting smacked around on all fronts these days.

One of the more dire developments is coming out of Oakland, Calif., where perhaps the most well-known dispensary in the industry lost a key battle with the IRS – at least initially.

Harborside Health Center, led by long-time industry advocate Steve DeAngelo, has been told that it does not qualify for standard business deductions it claimed in 2007 and 2008. After a tax audit that has stretched on for two years, the IRS said Harborside is involved in the “trafficking of controlled substances” and therefore can’t take deductions that most other businesses in the United States claim.

Harborside claimed deductions for expenses like health insurance, worker’s comp and payroll, paying about $500,000 in taxes in those years. Now, the IRS says it must pay an additional $2 million.

Harborside is operating under state laws, but like every other dispensary in the country it is still deemed an illegal business by the federal government.

An appeal is coming, according to Harborside officials.

It’ll be an important battle to watch, as it will affect every dispensary across the country. Owners often claim that taxes as one of their biggest concerns, and many have been following the Harborside case to see if they would be able to claim the standard deductions. Harborisde said it will be forced to close if the IRS won’t let it claim deductions because it will be difficult to make any money. If one of the most successful dispensaries in the country can’t make it any longer, other MMCs will have a hard time surviving as well.