A CASE OF STRATEGIC SILENCE: IRS GUIDANCE ON SECTION 471(C) & SECTION 280E

by Accounting TipsBusiness

IRS Guidance on Section 471(c) and Section 280E: A Case of Strategic Silence

In true IRS fashion, the memorandum recently brought to our attention explicitly avoids addressing the application of Section 471(c) in mitigating the impact of Section 280E. Instead, the focus is narrowly placed on what Section 471(a) allows, which, predictably, is not much. For resellers looking for relief under Section 471(c), the IRS’s silence speaks volumes.

 

The Memorandum’s Take on Section 471(a)

The IRS memorandum clarifies the costs that can be capitalized under Section 471(a) for resellers. These include the invoice price of goods (minus trade discounts) and necessary transportation or other charges incurred in acquiring possession of the goods. However, it stops short of offering guidance on Section 471(c), leaving out any discussion on the broader scope of costs that might be capitalized under this section.

 

What the IRS’s Silence Implies

The careful wording of the memorandum implies that if a taxpayer were applying Section 471(c), a different set of rules might apply, allowing for a broader range of costs incurred in purchasing and reselling goods to be included in inventory. This tacit acknowledgment aligns with what many tax professionals have long understood: Section 471(c) can potentially offer significant relief to businesses impacted by Section 280E.

While the memorandum avoids a direct endorsement, its language suggests that those who meet the criteria for Section 471(c) could capitalize more costs, thereby reducing the taxable income affected by Section 280E. This is a crucial insight for businesses in the cannabis industry and other sectors where Section 280E poses substantial tax challenges.

 

The Role of Form 3115 in Changing Accounting Methods

At the end of the memorandum, the IRS mentions the necessity of filing Form 3115 to change accounting methods. This requirement has likely tripped up many taxpayers who have not filed the necessary paperwork to adopt a Section 471(c) position. Filing Form 3115 is essential for obtaining permission from the IRS to change accounting methods, and failing to do so can result in the denial of the benefits associated with Section 471(c).

For those who have successfully navigated this process, the lack of IRS audits or examinations on their Section 471(c) position may be due to the procedural hurdle of Form 3115. This reinforces the importance of adhering to proper procedures when seeking to change accounting methods and capitalize on the potential benefits of Section 471(c).

 

Conclusion

The IRS’s memorandum may not provide explicit guidance on Section 471(c), but its strategic silence and the careful implications within its wording reinforce what many tax professionals already believe: Section 471(c) offers a viable path to mitigate the impact of Section 280E. By ensuring compliance with the necessary procedural requirements, such as filing Form 3115, businesses can better position themselves to capitalize on the benefits of Section 471(c) and potentially reduce their taxable income under Section 280E.

 

Here is the referenced IRS memorandum which supports our aggressive position on a code section IRC 471(c). 

Assete write off

WHAT KIND OF ASSET CAN I WRITE OFF?

by Accounting TipsBusiness

As a tax planning strategy, particularly towards the end of the year, a common question from clients is: “What can I buy to decrease my tax liability?” Many consider purchasing vehicles or making down payments on properties or building facilities. However, it’s important to note that there are limits. For example, buying real estate, including land and building, doesn’t usually offer immediate tax deductions. In fact, down payments on property in and of itself don’t qualify for immediate deductions.

The main category of assets eligible for immediate depreciation (sometimes called ‘bonus depreciation’) includes equipment that can be described as losing value upon purchase and is also not permanently affixed to a building or property. This category encompasses a wide variety of assets, from computers to tractors, dehumidifiers, trimming machines, and even essential building equipment like appliances.

For vehicles, to qualify for bonus depreciation or 179 deductions, they must have a demonstrable and primary business use. Purchasing cars for tax write-offs is often risky if they are not used exclusively for business. For instance, vehicles must be used over 5% of the time for business purposes to be eligible. If this percentage drops, the IRS may require you to recapture formerly deducted depreciation. If business use is less than 50%, consider opting for taking a mileage deduction (currently at $0.65 per mile), which is safer. For business owners, reimbursing oneself for mileage from the business for the use of a personal vehicle is recommended. This reimbursement is non-taxable and counts as a business expense. Remember that these business miles must be meticulously recorded for the deduction to be substantiated.  

Land, on the other hand, is not depreciable. It generally appreciates in value, and the IRS doesn’t allow depreciation as it’s seen as a cash-for-property exchange without actual value loss. Residential rental properties can be depreciated over 27.5 years and commercial buildings over 39 years, but these are long-term deductions and don’t offer much immediate tax relief.

Remember, specific equipment, such as above-ground irrigation systems, that aren’t permanently attached to the property can also qualify for bonus depreciation. Investing in equipment can be a smart tax strategy, especially if these are items you plan to purchase regardless.