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:
• Production – expenses that are clearly part of inventory.
• Selling – expenses that are clearly not part of production
• 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? Connect with me on TaxConnections.
Original Post By: Annette Nellen
Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.
Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.
Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.
Prior to joining SJSU, Annette was with Ernst & Young and the IRS.
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