I am NOT making this up. Last week the Internal Revenue Service issued advice to field personnel on how illegal drug 
traffickers should be handling taxable aspects of their, er, “business.”
Not many of my clients are drug dealers . . . OK . . . none that I know of. And I don’t offer tax advice to “commercial” interests. However, in the spirit of being useful, I thought I’d pass this little nugget along.
In Chief Counsel Advice 201504011 the IRS has explicitly held that a drug dealer may deduct the cost of goods sold (“COGS”) from gross receipts before reporting taxable income. Thirty-some-odd years ago Congress passed legislation prohibiting drug dealers from deducting trade and business expenses.
This didn’t prevent such “taxpayers” from capitalizing costs . . . so to close that little loop hole they issued the advice.
As the Advice noted,
Thus, a marijuana reseller using an inventory method would have capitalized the invoice price of the marijuana purchased, less trade or other discounts, plus transportation or other necessary charges incurred in acquiring possession of the marijuana. Similarly, a marijuana producer using an inventory method would have capitalized direct material costs (marijuana seeds or plants), direct labor costs (e.g., planting; cultivating; harvesting; sorting), Category 1 indirect costs (§1.471-11(c)(2)(i)), and possibly Category 3 indirect costs (§1.471-11(c)(2)(iii)).
So you can heave a sigh of relief (some) if you laid awake at night worrying about this little accounting conundrum. Whew.
