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 of 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 • 16 th Amendment • 263A – No “flush Language”
TIGTA H Hypoth otheti 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 0 100,000 Repairs & Maintenance 50,000 0 50,000 Salaries & Wages 100,000 0 100,000 Total Business Expenses 250,000 0 250,000 IRC 280E Adjustment (250,000) 0 (250,000) Net Business Expenses 0 0 0 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
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