As the cannabis industry braces for potential changes in federal marijuana rescheduling, businesses of all sizes face a critical question: How can they optimize their tax strategies this filing season to maximize savings and reduce federal tax burdens under Section 280E?
💡 A Glimmer of Hope: Understanding Section 471(c)
For small cannabis businesses, there may be a silver lining—Section 471(c) of the federal tax code. This provision has gained significant attention among cannabis operators with annual gross receipts under $29 million.
According to Nick Richards, a former IRS attorney and current cannabis industry lawyer at Greenspoon Marder, employing the 471(c) strategy can be transformative. It has the potential to reduce 280E tax burdens by up to 50%. However, Richards cautions that while this approach is promising, it still carries risks, such as potential audits by the IRS.
🏦 How Section 471(c) Works
Section 471(c) allows cannabis companies to classify certain expenses as Cost of Goods Sold (COGS)—a category typically exempt from 280E’s restrictions. CPA Calvin Shannon explains that businesses can account for inventory based on their financial records, making them eligible for standard deductions.
However, Richards warns that taking an aggressive approach with this strategy could trigger costly audits. Because no audit has yet challenged deductions under 471(c), there is no established legal precedent, making it difficult to predict how the IRS might respond.
📉 Balancing Savings and Risks
“Many cannabis companies use 471(c), but most take a conservative stance,” says Richards. The lack of legal cases means companies must weigh how much risk they are willing to assume. For example, a $25 million cannabis company could save up to $5 million annually by applying 471(c) deductions—a significant difference that could determine business survival.
⚖️ The Impact of Supreme Court Decisions
Richards highlights a potential game-changer: the Supreme Court’s decision in Loper Bright v. Raimondo, which overturned the Chevron policy. This ruling could provide cannabis businesses with stronger legal arguments if the IRS challenges 471(c) deductions. By stripping some power from federal agencies like the IRS, this decision might shift the balance in favor of cannabis operators.
🚨 Why Caution Still Matters
While 471(c) presents an incredible opportunity, Richards emphasizes that the strategy remains unproven in court. Companies struggling with profitability may still take the risk, as bankruptcy might otherwise be the alternative. However, until a legal precedent is established, cannabis businesses must proceed with caution when navigating 471(c) deductions.
🔍 Key Takeaways for Cannabis Businesses
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471(c) can significantly reduce tax burdens under Section 280E—sometimes by 50%.
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Inventory accounting flexibility allows more expenses to be classified as COGS.
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IRS audits remain a risk, especially for aggressive deduction claims.
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The Loper Bright v. Raimondo ruling may provide additional legal protection.
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Businesses should consult tax experts before implementing this strategy.
🌿 Final Thoughts: Charting a Sustainable Path Forward
As federal marijuana policies evolve, strategic tax planning will be essential for cannabis businesses. While Section 471(c) offers promising tax relief, its use requires careful consideration. The future may hold more clarity, but until then, staying informed and cautious is key to navigating these uncertain regulatory waters.