What is your position on 471(c)? That is the question on many operators’ minds. So, what is IRS Code Section §471(c)? It is a small business provision added by the Tax Cuts and Jobs Act of 2017 (TCJA). The section provides an exemption for small businesses, those with gross receipts under $25 million, in determining an appropriate accounting method for the treatment of inventories and thereby the related costs of goods sold. Taxpayers that meet the small business definition will be assumed to have an appropriate accounting method as long as the method used for tax purposes mirrors the one used in their applicable financial statements or, if not applicable, their books and records.
This had the cannabis industry abuzz three years ago as operators looked to reduce the burden of 280E. The IRS took notice of the industry chatter and in March 2020 the Treasury Inspector General for Tax Administration (TIGTA) issued a report specifically recommending that the IRS provide guidance on this issue. The IRS initially responded to the memo citing “other priorities” as a reason they did not intend to issue further guidance. This led to accounting industry professionals looking at implementing conforming accounting methods to utilize the ambiguity within the code and lack of guidance.
The IRS took note of this and in July 2020, issued the proposed regulations which specifically addressed IRC 471(c). These proposed regulations aimed to clarify the language in the code and states, in part:
- “While Congress provided an exemption from the general inventory timing rules of section 471(a), Congress did not exempt these taxpayers from applying other Code provisions that determine the deductibility or recoverability of costs, or the timing of when costs are considered paid or incurred.”
Congress did not intend Section 471(c) to supersede any existing tax laws like IRC 280E. This is made clear from the proposed regulations:
- “Inventory costs does not include a cost for which a deduction would be disallowed, or that is not otherwise recoverable but for… this section, in whole or in part, under a provision of the Internal Revenue Code.”
This is similar to the language included in IRC 263A and clearly defines their position. These proposed regulations were finalized in January 2021 and are meant to be retroactive to the effective date of the TCJA.
There is currently a pending case between Alternative Therapies Group, Inc (aka Curaleaf North Shore, Inc.) vs. Commissioner before the Tax Court. The case was filed in January 2022 and is looking at the 2018 tax year, a year where there was no official guidance on this issue as the regulations related to 471(c) had not been issued yet. It will be interesting to see where this case goes and how the Court decides; depending on the outcome this could be a big case for the cannabis industry.
Cannabis businesses should be able to conduct themselves the same as other businesses. In an ideal world, 471(c) would have provided needed relief towards a fairer tax treatment. Unfortunately that is not the case. IRC 280E is still very much in full effect, as it has been since 1982. In fact, that same TIGTA report remarked upon the significant growth of the industry and that the IRS will be paying more attention to the industry.
The IRS is certainly paying more attention to the industry. Every taxpayer is different, and accounting for inventory under Section 471(c) may not work for many cannabis businesses. Because of this, we advise cannabis taxpayers attempting to implement IRC 471(c) or any other aggressive inventory/COGS methodology positions to gain additional deductions to speak to a tax advisor before doing so.
For more information on cannabusiness tax planning and compliance needs, please contact Matt Martin at email@example.com. Citrin Cooperman’s Cannabis Advisory Services (CAS) team is here to help you focus on what counts.
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