Typically, businesses can claim tax deductions on ordinary and necessary business expenses on their taxable income, however Section 280E of the Internal Revenue Code (“Section 280E”) prohibits cannabis businesses enterprises (“CBEs”) from claiming these deductions and as a result subjects all of their income to taxation.
Section 280E was enacted to penalize the trafficking of illegal drugs, including marijuana. While many states, including New York, have legalized the sale and consumption of marijuana, for medical or recreational purposes or both, it is still illegal at the federal level. As a result, cultivators, processors, distributors, and retailers in the cannabis industry are prohibited from writing off many of their day-to-day expenses such as rent, utilities, compensation, costs of administration, and charitable gifts to promote goodwill on their income. Additionally, Section 280E requires CBEs to pay income tax on gross profits; whereas, most businesses pay federal income taxes on their net income, which is typically a lower figure.
On November 12, 2021, New York State Senator Jeremy Cooney sponsored bill S7518 (the “Bill”) to amend New York State’s tax law to curb Section 280E’s effect on CBEs operating in New York. If passed, the Bill would allow CBEs to deduct those ordinary and necessary business expenses on their New York State tax returns. Although the Bill does not apply to federal tax returns, it would provide tax equity to the emerging cannabis industry on a state level. The Bill aims to promote the procurement of cannabis licensure and ensure that the adult-use cannabis market is not solely dominated by large businesses. Currently the Bill is in the Rules Committee, and they will decide whether the bill is going to be presented to the Senate floor.
The Firm has been following the progress of New York’s cannabis industry from its inception and remains informed on all developments by the New York legislature. We are available to answer any questions regarding the Bill or other cannabis related inquires.