IRC C 471( 471(c) & & 280E 280E Presented by Greenspoon - - PowerPoint PPT Presentation

IRC C 471( 471(c) & & 280E 280E

Presented by Greenspoon Marder & Bridge West LLC Nick J. Richards, Esq and Calvin Shannon, CPA

IRC Sect ction 280E 280E:

EXPENDITURES IN CONNECTION WITH THE ILLEGAL SALE OF DRUGS No deduction or credit shall be allowed… if business consists of trafficking in controlled substances…

Secti tion 471( 471(c) c)

• Tax Cuts and Jobs Act
• Qualifying Taxpayer:
• Less than 25 million gross
• No GAAP or IFRS requirement – “applicable financial statement”
• Not a tax shelter
• Subsection (a) shall not apply, and
• TP Method of Accounting shall not fail to clearly reflect income if:
• Conforms to TP method of accounting…

Subsection (a) does n not apply

• (a) …inventories shall be taken… on the basis the Secretary may

prescribe… as most clearly reflecting income.

• = Cost of Goods Sold / Deduction distinction set forth in Treas. Reg. 1.471
• Thus, 471(c) eliminates the Secretary’s discretion to prevent costs from being

accounted for as inventoriable costs and included in COGS as inventory is sold

• Include all/most costs in COGS?

Chang nge o

• f A

Accounting ng M Method

• Any changed of accounting method made pursuant to 471(c) shall be

treated as initiated by the taxpayer with the consent of the Secretary.

• The IRS cannot deny the change!

Will ill t this is work?

On March 30, 2020 the Treasury Inspector General for Tax Administration issued a report titled “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.”

• TIGTA Report: qualified businesses would not be subject to the general rule for determining
• inventory. Instead, they may elect to use internal financial statements or accounting procedures to

account for costs in lieu of keeping inventories in the manner otherwise required by I.R.C. § 471(a)

• IRS Counsel clarified that cost of goods sold are not expenses
• Legislative Grace – on the side of the cannabis industry
• 280E – disallows deductions and credits
• Deductions
• 16th Amendment
• 263A – No “flush Language”

TIGTA H Hypoth

• theti

tical E Example: e:

Income/Expense Case A – 2017 taxpayer Case B – 2018 w/ 471(c) Case C – 2018 w/o 471(c) Gross Sales 1,000,000 1,000,000 1,000,000 Cost of Goods Sold (500,000) (750,000) (500,000) Gross Income $500,000 $250,000 $500,000 Advertising 100,000 100,000 Repairs & Maintenance 50,000 50,000 Salaries & Wages 100,000 100,000 Total Business Expenses 250,000 250,000 IRC 280E Adjustment (250,000) (250,000) Net Business Expenses Taxable Income $500,000 $250,000 $500,000 25% tax: $125,000 62,500 $125,000 Actual Income $125,000 $187,500 $125,000 Profit: 12.5% 18.75% 12.5%

Moving Fo Forward rd

Consult your Tax Professional:

• May require a change of accounting method
• Good accounting records will be critical
• GL & Written Accounting Procedures
• Taxpayers should understand the risk and
• exposures. Proceed with caution.
• Save your tax savings
• All or nothing?
• Protective claim for refund

TAX PROFESSIONALS LS

• Nick J. Richards, Esq.
• Partner at GreenspoonMarder, LLP
• 720-370-1169
• nick.richards@gmlaw.com
• Calvin Shannon, CPA, CVA
• Principal at Bridgewest CPAs
• 651-287-6347
• cshannon@bridgewestcpas.com