Under new Internal Revenue Service (IRS) guidance, state-legal cannabis operators can reduce gross business receipts using an accounting method available under Section 471, according to a WeedWeek report. Currently, all cannabis-related businesses that are considered illegal under federal law must file under Section 280E, which does not allow normal businesses expense deductions.

“The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.” — IRS update

Attorney James Mann, who is representing California dispensary Harborside in a tax dispute against the IRS, told WeedWeek that the update is a “good thing,” and the agency is “doing what it should be doing which is educating, in particular, the small cannabis business people about how to get into compliance and what the applicable rules are.”

“I know there are cannabis lawyers who say the federal government is constantly trying to crush the cannabis industry, and that may be their experience or may be true,” he said in the report. “But, generally speaking, I think the IRS is just trying to administer the tax law as they see it. Many people disagree with me, but I don’t see that they’re motivated by any special animus toward the cannabis industry. And this guidance proves it. This is the IRS saying, ‘Here are the rules of the game, guys.’”

Section 471, which was enacted under the tax law approved in 2018, allows businesses grossing $25 million or less in revenue to deduct a greater portion of their expenses. The update comes six months after a Treasury Inspector General for Tax Administration report indicated that industry tax compliance could improve with further use of Section 471.

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