Cannabis businesses <$29M avg receipts elect §471(c) to capitalize most operating costs into COGS, bypassing §280E disallowance.
IRC §280E denies all deductions/credits to trafficking-in-controlled-substance businesses EXCEPT Cost of Goods Sold. TCJA §471(c) allows small businesses (<$29M avg gross receipts, 2024) to use their book inventory method for tax — dramatically expanding what gets capitalized into COGS (indirect labor, facilities, utilities, security). Rev. Rul. 2020-15 and IRS Chief Counsel Memo restrict scope, but many cannabis operators reduce effective tax 10–25 percentage points. Requires clean book accounting mirroring the tax method.
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Separate ancillary services (consulting, IP, real estate, branding) into non-plant-touching entity — full deductions restored.
S-corp/LLC cannabis operators pay 37% on §280E-inflated income — C-corp caps federal rate at 21% flat.
Owner-operator's real estate LLC leases to licensed cannabis co — rent is fully deductible to CannCo, tax-favored to Holdco.
100% ESOP-owned S-corp cannabis operator pays ZERO federal tax — ESOP is tax-exempt shareholder.