Cannabis Business Owners Have a Way to Reduce Tax Liability

Fortunately, cannabis businesses now have a solution. In its recently updated its marijuana industry FAQ page, the IRS notes that state-legal cannabis businesses can reduce their gross receipts by using an alternative accounting method under § 471 of the Internal Revenue Code.

The FAQ provides that § 280E does not prevent participants in the marijuana industry from reducing their gross income by subtracting the cost of goods sold (COGS) calculated pursuant to § 471 from their gross receipts.

Generally, § 471 of the Code allows qualifying small businesses with less than $25 million in annual gross receipts to use an alternative accounting method where the gross receipts of the business are reduced by the cost of inventory and other expenditures, ultimately reducing the tax liability of a small business by a substantial amount.

The FAQ provides further guidance for those in the marijuana industry looking to comply with federal income tax reporting requirements. These conditions include state-legal cannabis businesses tax filing obligations; potential penalties and adjustments; and payment plans for those businesses who cannot fully pay their tax obligation.

For the state-licensed cannabis industry, the implications of § 471 are significant. Rather than go through the detailed process of tracking inventoriable costs and losing the rest to the void of § 280E, companies can potentially adopt an accounting policy that treats all costs as COGS and receive a deduction for these expenditures on their tax returns.