On April 9, 2022, New York Governor Kathy Hochul signed the New York City Budget Bill 2022-2023 into law. One of the main provisions of the bill was a decoupling of the IRC Sec. 280E, the severely inhibitive rule that denies most tax deductions to cannabis businesses (explained later). NY is one of several states that by default conforms to the federal tax code for businesses and individuals, unless the state makes specific legislative adjustments. On or after January 1, 2022, federal deductions disallowed under IRC Sec. 280E will now be permitted in calculating New York tax for cannabis businesses licensed in New York State. This benefit will apply regardless of whether the cannabis business operates as a corporation or a partnership (LLC). Briefly, in 1982, Congress enacted the IRC Sec. 280E. With the exception of Direct Cost of Goods Sold (“COGS”), IRC Sec. 280E disallows all federal gross income tax deductions and credits if a taxpayer is engaged in the business of manufacturing, distributing, or selling certain controlled substances classified as a Schedule I or Schedule II drug pursuant to Controlled Substances Act 1970.
Cannabis is currently listed as a Schedule I drug. Therefore, any sales activity is considered trafficking under federal law.
Change in New York’s favorable position on IRC Sec. 280E was part of an effort to promote the cannabis trade in the state and will now allow cannabis businesses to take advantage of ordinary business deductions at the state level, which could significantly reduce the effective tax rate of a cannabis company in New York.