IRS Cannabis Business Tax Guidance on IRC 280E, Cannabis CoGS and IRC 471c

Recently the IRS released guidance for cannabis businesses about IRC 280E, IRC 471 including 471c. We wrote a quick blog post about it which you can read here.

In this video, we breakdown why this new IRS website did not give the go-ahead for a new tax loophole for the cannabis industry.

If you need help with your cannabis business taxes or cannabis accounting, then please reach out to us at https://greengrowthcpas.com/get-started/ or call 800-674-9050.

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Video Transcript

The IRS had given some guidance on cannabis and marijuana businesses. We’ll let the room fill up here that all the channels turn on, and then we’re going to hop into our video today. So just give a few minutes here. About 15, 20 seconds. We’ll give actually not too long. All right. Cool. Yeah. So just before we hop to everything, you know, talking about the IRS guidance that came out with the, um, they came a website, you know, talk about marijuana related businesses and tax guidance on that, essentially. So we’re gonna pull back and, you know, talk about one of the aspects that they were given guidance on that is probably creating a little bit of confusion for some people. So before we get started, I need to let you know that the information contained in this presentation is meant for guidance purposes only, and not meant as … As professional legal or tax advice and further, it does not give any personalized legal tax investment or any business advice in general.

So just hop in and give some color and context. So we’re going to talk about, should be a 10 to 15 minute video, nothing too laborious, but kind of opening your eyes to some of the obviously misinformation or just discussed information out there. So a few weeks ago, you may have seen news outlets, even us reporting that the IRS put up a web page or website giving guidance for cannabis related businesses. Now, one interesting question was around IRC 280E and deductions for cannabis businesses. We should be very well aware of what 280E is, but from the frequently asked questions page on the IRS guidance from marijuana related businesses, there was a section that kind of created a stern, and I’ll just read it here and we’ll jump into it and pull it apart. So what it says here, a section 280E does not however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.

The internal revenue service takes a position that section 280E effected taxpayers must calculate their cost of goods sold pursuant to IRC section 471 and the associated treasury regulations. Now that last sentence there about 471, this made people think that the teeth were taken out of 280E and then if your cannabis business makes less than $25 million, you can just treat all costs as inventory double costs, including your typically nondeductible costs, your SGNA costs, things like sales and marketing and computers and things that you can’t really write off nowadays. So it was very out Abby ambiguity or ambiguous in that sentence, they wrote this wrote section 471, the IRS did. So that’s what we’re going to talk about today. So what is section 471 of the tax code? Well, 471 is a main section of the tax code that deals with inventories and inventory costs.

And it has a lot of, a lot, a lot, a lot of parts to it. So you have 471. See, that’s what we’re going to unpack today. And then you have 471.3, 471 point 11. They’re all part of it. So it’s all connected, which kind of makes this discussion confusing to some people that led them to believe that the IRS website was clarifying the new tax tax cuts and jobs act, which is tax law tax loophole, which is actually a tax law. So what is this tax loophole or this tax law? Well, first I want to start off by saying there’s no such thing as loopholes. These are laws that are accessible by all tax paying people or tax paying businesses. So these are laws. You just have to know somebody who knows the laws to then implement them for you, and then allow you to take advantage of these laws, right?

If you don’t know about them or don’t know what they are, then you’re probably going to be in a worse off position compared to your competition, but essentially what the tax cuts and jobs act allowed or put into the thing that says the 471c got updated or K in 2018. And essentially it made an update whereby an entity with gross receipts, less than $25 million can choose its method of keeping their books. So this seems like it would apply to nearly most cannabis businesses cause they, most of them make under $25 million a year. Now note that this change in accounting method, it needs to be approved depending on what you change. Right? If you go from cash accounting to accrual based accounting, you’re going to need to get that change in accounting method approved. Now they made that abundantly clear. They being the IRS, they made it very, very clear that if you’re going to change your accounting method, that you need to have this approved.

And they talked about this specifically for cannabis businesses in the Richmond patient group case. So I’ll link to that after the live stream is done, where you can search our YouTube channel for the Richmond patient’s group case that came out this year, I believe in April or something like that. But at any rate, that’s not really what the meat we’re talking about here or really caught talking about here is that all the tax play let’s talk about the tax play for this, right? The tax plays that you would then under this whole $25 million, you can change your accounting method that you would treat all of your costs. As inventory double costs, even costs that are not ordinarily inventorial costs such as selling costs in general administrative costs. Now essentially you could, in theory, in theory, record all of those costs into inventory and expense them and flush them into cost of goods sold.

Now, why is this law not a bypass, a 280E and that you should not try to use this as a cannabis business. So when our team read this new IRS page, we comb through it. We had a team meeting, all hands meeting. We read their mention of 471 as 471.3 and 471 point 11, not 471c for the following reasons we thought this, okay, under 471c, as I explained earlier, in this video, you can choose your method of keeping your books now. So you could theor that theoretically say that all of your sales and marketing expenses are going to be inventory costs based on your method of keeping your books. Therefore you could just push them down into cogs. However, the IRS page, the new one that went up on September 11th, it says it specifically accordingly a marijuana dispensary may not deduct for example, advertising or selling expenses.

It may however, reduce its gross receipts by its cost of goods sold as calculated pursuant to the internal revenue code section 471. No. So let’s build on that last sentence there, the new IRS page for cannabis businesses or marijuana businesses, specifically links to chief counsel advice dated one 23, 2015, which goes into detail on costing of inventories and costs of goods sold. Now the linked advice specifically States that one dash four seven one dash three and one dash four seven one 11 is the way to go about inventory costing and cost of goods sold. And in addition, that linked advice that we talked about, the chief counsel advice from January 23rd, 2015, it States that 263a, which is also known as unit cap, which is more generous than one dash 471 when it comes to the treatment of inventory will cause they say in that same advice there that it’s not applicable to cannabis based businesses or marijuana related businesses since it was enacted after the 280E law was passed.

So knowing that point right there, that last sentence we would assume in the last sentence, I’m going to say it again, that since 263a was enacted after 280E it is not applicable to cannabis based businesses. So again, let’s build on that. We would assume that same logic that the IRS would take the same position on this Trump tax law or the tax cuts and jobs act of 2018 and 471c and indicate that since 471c was passed after 280E, it does not pertain to cannabis businesses and they can not take advantage of that. So to tie all of this up here, there is no new tax loophole to bypass 280E and anyone that interprets this and new IRS web page, as such as putting themselves their co-founders at incredibly high, high risk. And if you’re a tax professional and you’re going to implement this for your clients, you’re probably putting your clients at an incredibly high risk.

That’s unnecessary. So just tying it up 471c came after 280E and since a unit cap, which is 263a was taken away from cannabis businesses because it was created after 280E, it’s likely that 471c will not be accessible by cannabis based businesses, 471, just that tax code. It’s a very large tax code with many facets. And the IRS page gave enough ambiguity for spectrum that the tax cuts in jobs act 471c tax law could potentially be used. So it’s up to you to make your decision on that. We’re just trying to clear something up because you know, these news outlets, oldest new tax codes tactical, but they don’t tell you what the hell that actually means. So I hope that this video has broken that down for you, right? There’s no additional room for cannabis businesses in this new IRS page.

It’s just informational and clarifying their positions already. There’s nothing new to be found in this, right? We’ve made a video on essentially everything that’s in that IRS webpage before, even when this was just an informational page. So show this video to your CPA and see if they say something different. If you’re a CPA or an EA or a tax preparer, watch this and let me know. What do you think about it? Right. You know, if you, as a cannabis business, show this to your CPA and they put your cannabis business at risk by taking all these unallowable deductions because of this 471c tax loophole or opportunity in, you know, in their loose interpretation of some website, put up by the IRS, then, you know, they’re really putting you at high risk and you should be ready for what comes during an audit. You know, everyone has their own risk tolerance.

And if you want to be very aggressive with your taxes, you know, you have the option to just deduct everything. And this is all a choice there’s laws, and you can break laws. You can willingly break the laws is this there’s going to be ramifications for that. So essentially someone’s going to have to be the first to test 471c for cannabis businesses. But I in our group would not recommend this action, this risky action to any of our clients. This is not something that we’re going to recommend to any of our clients, right? You work very hard to get your business open with licensing and build out and truing up your systems. Only that get caught in some long tax battle over some expenses, you know, just cause you want to be a superhero and be a groundbreaking person in the tax space.

It just seems like not a good risk reward balance. So if you have any questions about cannabis taxes or cannabis related businesses and the taxes or anything financially related to your cannabis business, please reach out to us. Visit our website at GreenGrowthCPAs.com. Click the get started button in the top, right corner, fill out the form, schedule some time to chat with our team and we can walk you through your particular tax situation. Or you can give us a call (800) 674-9050. Leave a message. We’ll get back to you. All right. So let’s go ahead and see if there’s any questions here and then we’ll hop off on this live stream. So I see a question here, say, does it toss 20 K for a type one, a license? I’m not specifically sure. What a type one, a license is for your state.

Um, I mean, just look up really quick for California. If they’re calling in one, a CA cannabis will deceive real corporate, that is of cultivation. I think in the city of LA, at least they are doing, I think it’s a $20,000 licensing fee per license. So John, yes, these licensing fees are very, very, very high Rhode Island I think is a half million dollars a year for their retail license fee. So it’s very, very expensive to be in a regulated industry. Cannabis is, as a regulated industry is no more prohibitively expensive than jumping into the, uh, like an airline industry or any other regulated industry. There are going to be other taxes associated with this cannabis industry that are not associated with the aviation or with other industries, pharmaceuticals and things of that nature, but the costs are incredibly high. So there are other States like Oklahoma that you can move to or partner with somebody in that state.

And you can start it for, you know, maybe 30% of the budget that you would in another state. So there are other options. And if you’re really as passionate, not you specifically John, but if anybody that wants to get into the industry says, they’ll do anything to get into the industry, then move, leave the state. That’s holding you back and go to another state that allows you to, you know, start your business at a cheaper rate, you know, make mega sacrifices for longterm generational wealth and generational success. You know, if you’re going to have an excuse, there’s always a remedy to it. It’s just, how much do you want to sacrifice for your business or for what you think this could turn out to be? So hopefully that answered your question, John. Again, if you guys have any questions about cannabis, businesses, taxes, please reach out to us via our website @ greengrowthcpas.com or give us a call at (800) 674-9050. Have a great day. Thank you very much for your time. And we’ll talk to you soon.

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