Cannabis Law Glossary
IRC 471(c) and Cannabis Accounting
Definition
A provision added by the Tax Cuts and Jobs Act of 2017 that allows small businesses to use a simplified inventory accounting method, which cannabis operators have used to expand their allowable COGS under Section 280E.
What Is IRC § 471(c)?
Section 471(c) of the Internal Revenue Code, added by the Tax Cuts and Jobs Act of 2017, allows businesses with average annual gross receipts of $25 million or less (indexed for inflation) to use a simplified inventory accounting method. Instead of using complex UNICAP rules, these businesses can use their financial accounting method for tax purposes.
How Cannabis Operators Use 471(c)
For cannabis businesses subject to Section 280E, the only allowable deductions are those attributable to Cost of Goods Sold (COGS). Under traditional IRC § 471 inventory accounting, COGS for retailers includes the cost of inventory acquired. For cultivators and manufacturers, it includes direct production costs.
By adopting IRC § 471(c) and using their financial accounting method (typically including a broader set of indirect costs as COGS under financial accounting standards), cannabis operators can argue that a larger portion of their expenses qualify as COGS — thus reducing taxable income under 280E.
Practical Example
A cannabis retailer might traditionally only include wholesale inventory acquisition cost as COGS. Under a 471(c) approach, the retailer's financial accounting COGS might also include labor costs for budtenders, packaging, and store overhead allocated to inventory. This expanded COGS reduces the 280E-inflated taxable income.
IRS Scrutiny
The IRS has challenged aggressive 471(c) positions in audits. The distinction between which costs are "incident to and necessary for production" versus general operating expenses continues to be litigated. Taxpayers must maintain meticulous documentation and ensure their financial accounting methods are genuinely consistent with their tax positions.
Related Terms
See also: [Section 280E](/glossary/section-280e), [SAFE Banking Act](/glossary/safe-banking-act), [Cannabis Rescheduling](/glossary/cannabis-rescheduling)
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