Simplified Inventory Election for Small Businesses May Be a Tax Disaster for Marijuana Businesses

An interesting article appeared in Tax Notes Today on February 1, 2019 that raised a question regarding whether a business that is deemed to be trafficking in a federally controlled substance might significantly increase its federal tax if it makes the election added by the Tax Cuts and Jobs Act to escape the provisions of IRC §471(a) and account for its inventory either:

  • By accounting for such inventory as non-incidental materials and supplies pursuant to Reg. §1.162-3, or

  • Conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

This election is open to businesses that have average annual gross receipts of $25 million or less for the prior three years (adjusted for inflation) and which is not a tax shelter as defined by IRC §448(a)(3)..

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