Initial Tax Relief for NYC Cannabis Businesses – Is More to Come?

Nov 22, 2023
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By: Matthew E. Foreman, Esq., LL.M. and Terran Cooper

As New York State anticipates licensing hundreds more cannabis businesses in the coming months, New York State has permitted New York City to decouple from Section 280E of the Internal Revenue Code.

Section 280E of the IRC has been a longstanding burden on state-legal cannabis businesses across the nation. Section 280E disallows businesses “trafficking in controlled substances” from deducting business expenses beyond the cost of goods, which includes all Schedule I Controlled Substances, such as cannabis. The inability of cannabis business to deduct ordinary business expenses can result in effective tax rates of up to 80%.

Last year, Governor Kathy Hochul signed New York’s 2022-2023 budget bill, which (among other things) decoupled NYS from IRC Section 280E. NYS had previously followed IRC Section 280E, but now allows NYS licensed cannabis businesses to include disallowed federal deductions in their NYS tax calculations.

However, New York City has a separate authorization to follow the IRC, and accordingly Senate Bill S7508, which was recently signed into law by Governor Hochul, was required to allow deductions “in an amount equal to any federal deduction disallowed by section 280E of the Internal Revenue Code.” This allows state-legal NYC cannabis businesses to deduct their business expenses when calculating taxable income under New York City’s Unincorporated Business Tax (UBT), General Corporation Tax (GCT) and Business Corporation Tax (BCT).

Of perhaps greater consequence, is the potential of rescheduling cannabis to a Schedule III controlled substance (or other less restrictive classification). The Department of Health and Human Services’ recent recommendation to reclassify cannabis as a Schedule III controlled substance, if acted upon by the DEA, could remove the burden of Section 280E for cannabis businesses, drastically reducing tax burdens for cannabis businesses and reshaping the national cannabis landscape going forward.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.

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