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Cannabis Business Use of Section 471(c)

Posted by Brandon Keim | Jan 13, 2021 | 0 Comments

Businesses that sell cannabis face unique tax restrictions. Being aware of those unique challenges will help increase your business revenue and reduce your tax burden. Working with a lawyer can help you address these restrictions in a manner that favors your business and decreases the risks that you may face if you do not follow the rules correctly.

One key provision of the Tax Code that is important to be aware of is section 471(c). This provision is included in the section of the tax law that deals with business inventory. It is relevant to your ability to deduct the costs of goods sold (COGS). These are the costs of producing goods sold by a company, which usually include material and labor costs used to create the goods. COGS may also include costs associated with marketing and distributing. Based on some legal cases and decisions by the IRS, cannabis businesses must use the rules of section 471 of the tax code to calculate COGS.

However, this is not where the issue ends. There are ongoing court cases as well as proposed regulations that may change this restriction. A rule in the Tax Cuts and Jobs Act included provisions that seemed to prevent the IRS from changing the inventory method used by a small business as long as the business's method of treating inventory is supported by its financial statements. This wrinkle may mean that the old, more expansive method for calculating COGS can be used.

What does all this mean for your business?

The bottom line for your businesses is that greater deductions leads to less taxes you will have to pay. Whether you must use 471 or 263 as the approach for calculating COGS is a factor that will impact your amount of deductions. Working with a lawyer will help you choose the right strategy for your business to prevent revenue loss.

Frazer Ryan Goldberg & Arnold LLP is a nationally recognized law firm meeting the needs of closely held businesses. Call Senior Partner, Tax Controversy Attorney, Brandon A. Keim at (602) 200-7399 today to strategize maximum revenue retention in cannabis related businesses. 

About the Author

Brandon Keim

A Certified Tax Law Specialist, CPA, partner at Frazer Ryan Goldberg & Arnold LLP, and former Senior IRS Trial Attorney, Brandon Keim holds an LL.M. in Taxation from Georgetown University Law Center.

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