New York to Allow Additional Tax Deductions for Cannabis Businesses
May 09, 2022
By Benjamin Aspir, CPA MST
On April 9, 2022, New York Governor Kathy Hochul signed New York's 2022-2023 budget bill. One of the key provisions in the bill was a decoupling from IRC Sec. 280E, the severely inhibitive rule that denies most tax deductions to cannabis businesses (explained further below). NY is one of several states that, by default, conform to the federal tax code for businesses and individuals unless the state makes specific legislative adjustments. Beginning on or after January 1, 2022, disallowed federal deductions under IRC Sec. 280E will now be permitted in calculating NY tax for NY state-licensed cannabis businesses. This benefit will apply regardless of whether the cannabis business operates as a corporation or partnership (LLC). As a brief background, in 1982 Congress enacted IRC Sec. 280E. With the exception of direct cost of goods sold (“COGS”), IRC Sec. 280E denies all federal tax deductions and credits from gross income if a taxpayer is engaged in the business of the manufacture, distribution or sale of certain controlled substances classified as a Schedule I or Schedule II drug pursuant to the 1970 Controlled Substances Act.
Cannabis is currently listed as a Schedule I drug. Therefore, any sales activity is considered trafficking under federal law.
New York’s favorable position change on IRC Sec. 280E was part of an effort to promote the cannabis business in the state and will now allow cannabis businesses to enjoy the benefit of ordinary business deductions at the state level, which could dramatically reduce a cannabis company’s effective state tax rate in NY.