10 Jul IRC 471 and IRC 280E
Does IRC section 471(c) allow an opportunity for a Cannabis retailer to get around IRC section 280E? I’m been hearing and reading many articles in the industry that this fairly new law Internal Revenue Code Section (IRC) 471(c) allows a business that generates under $25MM of gross receipts to ignore IRC section 280E if they have financial statements that show their typical overhead costs are part of inventory or COGS. The IRS hasn’t issues any specific guidance, but now unfortunately, we have a tax court case that says ‘NO”. It says that IRC section 471(c), doesn’t allow a taxpayer to get out of IRC section 280E. The tax court case is called Patient’s Mutual Assistance Collective Corporation, Dba: Harborside Health Center v. Commissioner of the Internal Revenue Service US Court of Appeals 9th Circuit 2021-1 USTC ¶50,130, (Apr. 22, 2021).
Read the case, but in a nutshell, here is what was discussed:
- Harborside tried to argue that expenses they cannot deduct due to IRC section 280E should be deductible under inventory costs under general inventory tax accounting rules of section 471. But with various cases like Thor Power Tool Co. v. Commissioner 79-1 USTC, and Treasury Regulation 1.471-3(d), it has already been stated items that are part of COGS and items of overhead ARE NOT costs which are part of COGS which are costs related to the purchase costs or the produced costs.
- The case also discussed that even if Harborside decided to create an accounting method to treat overhead costs as inventory costs or COGS costs, based on Thor Power Tool and Regulation 1.471-3(d) a taxpayer CANNOT just make up COGS calculations which are not based on COGS calculations which have already been litigated and created laws.
So, if you are working with a professional and they are discussing deducting IRC section 280E costs related to IRC section 471(c), have a discussion with them after you read the tax court case. Unfortunately, Cannabis retailers still get hit hard with IRC section 280E, and hopefully the Federal government will update the tax laws and allow state legal Cannabis businesses to be taxed just like any other business.
Also note that the IRS has stated it is using State Cannabis license information to select IRC section 280E examinations. We still feel there is a benefit of owning a Cultivation company and retail business from a tax perspective. However, there are other risks to watch out for also. There have been tax court cases also that have found that a management company that is related to a cannabis business can’t get out of IRC section 280E either, so be careful and be prepared.