The Relationship between Section 471(c) & Section 280E in the Cannabis Industry

The evolving landscape of the cannabis industry in the United States has led to numerous legal and financial challenges. A critical issue that requires close attention is the interaction between Section 471(c) and Section 280E of the federal tax code. This CannaBlog will explore the potential impact of these sections on the cannabis industry.

Section 280E: A Curse on the Cannabis Industry

Section 280E’s ramifications on the cannabis industry cannot be understated. Because of the federal illegality of cannabis, Section 280E prevents plant-touching companies from deducting traditional business expenses. Consequently, some cannabis businesses pay more in taxes than they earn. This provision has turned economic losses into taxable gains for many cannabis companies.

Section 471(c): A Possible Salvation?

While Section 280E has been a stumbling block for the cannabis industry, the emergence of Section 471(c) has brought a glimmer of hope. Created under 2017’s Tax Cuts and Jobs Act, Section 471(c) allows small taxpayers with less than $27 million in revenue to account for inventory according to their underlying books and records.

This provision appears to provide cannabis businesses with the ability to include costs otherwise disallowed under 280E into inventoriable costs and cost of goods sold (COGS). By allowing costs disallowed under 280E to be recognized as inventoriable costs and COGS, Section 471(c) opens the door for small cannabis businesses to potentially reduce their taxable income.

A Complex Interplay: Key Questions

Applicable Financial Statements

What are they, and how do they relate to Section 471(c)? Applicable Financial Statements refer to audited financial statements required for non-tax purposes, such as credit or regulatory compliance. Such statements may limit the ability to add costs disallowed under Section 280E into COGS.

Accounting for Inventory

Can a small cannabis company establish a method that considers most expenditures as inventoriable costs? While there is no direct guidance from the IRS, Section 471(c) potentially allows a qualifying business to include otherwise non-deductible costs as COGS. However, this is still a contentious issue and might face resistance from the IRS.

Risks and Challenges

Utilizing Section 471(c) to navigate the hurdles of 280E is not without risks. From potential legal disputes to additional tax liabilities, cannabis businesses must weigh their options carefully. Accountants must also be cautious in applying this provision, maintaining accuracy and proper justification for using 471(c).

Get Guidance On Your 280E Challenges

The relationship between Section 471(c) and Section 280E in the cannabis industry is intriguing and complex. While 471(c) offers potential relief from the harsh realities of 280E, the lack of concrete guidance from the IRS or informative case law and the complexity of applying these provisions leaves the industry with more questions than answers. While considering the potential risks and benefits, cannabis businesses must work closely with their advisors and accountants to navigate these intricate issues. As the industry evolves, staying informed and adaptable is crucial for success.

Contact Bridge West or Calvin Shannon with any questions or assistance regarding 471(c) and 280e!

Schedule an Appointment

“BGM” is the brand name under which BGM CPA, LLC and BGM Group, LLC provide professional services. BGM CPA, LLC and BGM Group, LLC practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. BGM CPA, LLC is a licensed independent CPA firm that provides attest services to its clients, and BGM Group, LLC and its subsidiary entities provide advisory, and business consulting services to their clients. BGM Group, LLC and its subsidiary entities are not licensed CPA firms. The entities falling under the BGM brand are independently owned and are not liable for the services provided by any other entity providing services under the BGM brand. Our use of the terms “our firm” and “we” and “us” and terms of similar import, denote the alternative practice structure conducted by BGM CPA, LLC and BGM Group, LLC.

BGM WEALTH: Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.