What is Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act includes a section entitled Small Business Accounting Method Reform and Simplification. This tax law allows small businesses that have less than $25M in revenue to no longer be required to use the accrual method of accounting. It also includes a provision that disallows the IRS from changing the inventory accounting method used by the taxpayer under audit as long as the taxpayer’s method of treating inventory is supported by its financial statements or in the books and records of the taxpayer.
Books and records will need more clarification going forward. There May, and I emphasize the word May, be an opportunity for Cannabis Companies to use the allocation methodology allowed under IRC Section 263A. Section 471(c)(4) provides that a taxpayer that is changing its method of accounting to take advantage of Section 471(c) gets automatic IRS consent to the change in method. This provides a unique opportunity for many taxpayers to review their accounting methods to determine the most beneficial method of computing COGS.
To further support for this position: The American Institute of CPAs (AICPA) submitted comments on the new small business accounting rules and urged the IRS to “direct examiners to suspend current examination activity for taxpayers with average annual gross receipts of $25 million or less” for issues involving capitalizing costs and methods of accounting for inventory and suggests that “prior year audit protection” is necessary for issues where the taxpayers will file a Form 3115 changing accounting methods for 2018 and later. How would this impact your Cannabis Company?
? Changing your accounting method from cash to accrual may reduce your taxable income
? This combination of tax statutes may be used to make adjustments to COGS
? The IRS will generally accept these changes as long as your books and records support the change in the accounting method
? The statute has only two major limitations: a) your company must have gross sales less than $25M and b) you can only take this position on the original return
NOTE: This position has not been tested in the courts and the IRS has issued no guidance as they state other priorities before they can give guidance. Therefore, there is some risk associated with taking this position.