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Amid fresh uncertainty over federal marijuana rescheduling, cannabis businesses of all sizes face questions around what the best tax strategy may be for the upcoming filing season, especially as they try to maximize savings under the harsh burdens of section 280E.

But there could be good news for small cannabis companies. Enter federal tax code called 471(c).

That relatively new federal tax provision has grown in popularity over the past few years in the cannabis accounting world, specifically with cannabis operators with annual gross receipts of $29 million or less, Greenspoon Marder partner Nick Richards told Green Market Report.

Richards, a former IRS attorney turned cannabis industry lawyer, said the savings from employing the 471(c) strategy is a potential “life-saver” for small cannabis companies. He’s seen it reduce 280E tax burdens by up to 50% or more.

But, he emphasized, it still involves a lot of uncertainty and risks a potential audit.

Richards believes the 471(c) strategy is already in use broadly across much of the U.S. marijuana industry, and word on the street is that the IRS hasn’t been challenging such tax positions with audits.

And those savings could be theoretically stretched even further than they have already by the industry, depending on how much exposure a given small company is willing to risk.

“There’s a lot of cannabis companies using 471(c),” Richards said. The provision governs what exactly is allowed to be classified as “cost of goods sold” by cannabis companies, or COGS, a category that is one of few federal deductions allowed for the marijuana industry under 280E.

“It’s a very simple code section. So if that would allow cannabis companies to put all of their costs into ‘cost of goods sold,’ they could completely eliminate 280E,” Richards said.

In other words, 471(c) allows for cannabis companies to “account for inventory according to their applicable financial statements or their underlying books and records,” which can then be characterized as the “cost of goods sold” and deducted as a normal business expense, according to CPA Calvin Shannon.

The catch is that if a small cannabis company takes too extreme of a position with 471(c), it could invite an unwanted and potentially expensive audit.

For that reason, most businesses using the 471(c) position to offset 280E haven’t been very aggressive or attempted a 100% offset of the 280E burden, at least as far as Richards is aware. That in turn has meant no audit results to challenge in U.S. Tax Court, which means there isn’t real legal precedent for the industry to rely upon.

That also means it’s impossible to know where the IRS may draw a line in the sand regarding cannabis 471(c) tax deductions.

“The IRS doesn’t seem to be interested in it. CPAs are basically saying, ‘Yeah, our 471(c) clients aren’t getting audited,’” Richards said.

“If it can be taken to its ultimate extreme, then 471(c) can do away with the complete disallowance of costs under 280E. It’s hard to know how far you can go with it,”  Richards said. “If we take 471(c) at face value, what it says, it doesn’t provide a limit to what you can put into cost of goods sold, so long as it matches your books and records. … So if you’re a $25 million company, your gross is $25 million, your 280E burden is probably $5 million a year at least. So that’s huge. That’s a $5 million change.”

The cannabis industry last year probably got yet another legal arrow in its quiver with which to defend deductions claimed under 471(c), Richards said, with the Supreme Court’s decision in Loper Bright v. Raimondo, which overturned the longstanding Chevron policy.

That decision, Richards said, could have a real-world impact if or when the IRS takes a more hardline approach to cannabis deductions claimed under 471(c), because it removes power from federal agencies like the IRS.

But the code itself – as far as 471(c)’s implications for 280E deductions – is “clear as day,” Richards argued, and does not limit COGS. That may differ from the IRS’s regulations, however, which is where the Loper decision could come into play.

“It is still unproven. It could be wrong, but if your company is struggling, do you care? The alternative is going out of business,” Richards said.