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Thursday, February 12, 2015

Taxable income of a marijuana business

Despite marijuana operations at the state level being legal at the state level since 1996 in California (and now many states), tax guidance has been sparse.  A recent, non-binding Chief Counsel Advice memo sheds some light on how the UNICAP rules apply (or don't apply), but more is needed.

I've got a short article in the AICPA Tax Insider today about the CCA and its meaning - here.

A few more observations beyond the article: While the CCA basically says that the UNICAP rules do not allow a seller of a controlled substance, such as marijuana, to treat more costs as inventoriable, there seems to still be some leeway for a producer. Producers have been subject to the Reg. 1.471-11 full absorption rules since before UNICAP. These rules require treating direct materials and labor as inventoriable and then specify how to deal with indirect costs, which the regulation separates into three categories:
  1. Production - expenses that are clearly part of inventory.
  2. Selling - expenses that are clearly not part of production
  3. Other - treat the same as you treat for books.
So, it seems that if for books, the producer leans towards treating costs as production-related, if justified and clearly not a category 2 cost, it does the same for tax and gets a better result than would a producer who treats category 3 as mostly non-production costs.  Is this the intended application of the Section 280E rule? 

If you are not familiar with Section 280E, read the article - it also has links to the tax rules cited above.

What do you think?

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Jordan said...

Great post! With all of the recent legalization, it's been confusing as to what to do from a tax guidance side. Thanks for the information!

Edmond G. Belanger said...

Great post

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