As New York gears up to launch its recreational marijuana market, it is also exploring a tax proposal that would significantly benefit adult-use and medical cannabis businesses…
As New York gears up to launch its recreational marijuana market, it is also exploring a tax proposal that would significantly benefit adult-use and medical cannabis businesses. Both the Senate and Assembly budget proposals include a bill (A8808/S7518) that would authorize licensed cannabis businesses to deduct ordinary and necessary business expenses when filing state tax returns.
The bill’s sponsors argue that the tax change is needed to make New York’s cannabis industry accessible to small businesses and equity applicants. “NY’s cannabis industry already employs hundreds, and will be expanding significantly in the years to come,” sponsor Assemblywoman Donna Lupardo said. “They should be treated the same as other business entities regardless of federal law. All hemp-related, medical and adult-use cannabis businesses should be able to take standard business deductions. I’m pleased to see that both houses have embraced the need for advancing this change.”
Tax Challenges for Cannabis Businesses under Federal Law
As we have discussed in prior articles, the fact that marijuana remains illegal under the Controlled Substances Act (CSA) puts cannabis businesses at a disadvantage for federal tax purposes. Section 280E of the Internal Revenue Code prohibits businesses from deducting otherwise valid business expenses where the business “consists of” dealing in controlled substances set forth in Schedules I or II of the Controlled Substance Act. I.R.C. § 280E expressly states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Section 280E applies only to deductions attributable to a taxpayer’s drug-related trade or business. Accordingly, the provision does not generally disallow deductions attributable to a taxpayer’s non-drug-related business. Nonetheless, not being able to make ordinary and necessary business deductions significantly increases the costs of doing business for the legal cannabis business.
While several businesses have challenged the application of 280E to legal cannabis businesses, their efforts have been unsuccessful. As discussed here, the U.S. Supreme Court last year declined to hear a case challenging the federal ban on tax deductions for state-licensed cannabis businesses. Efforts for a legislative solution have also failed to advance in Congress, which leaves states like New York looking to state-level solutions.
Proposed Changes to New York Tax Law
Both the New York Senate and Assembly budget proposals contain language that would allow cannabis businesses to deduct business expenses. It states that beginning this taxable year through January 1, 2025, “the provisions of Section 280E of the Internal Revenue Code, relating to expenditures in connection with the illegal sale of drugs, shall not apply for the purposes of this chapter to the carrying on of any trade or business that is commercial cannabis activity by a licensee.”
Standalone legislation has also been proposed in the New York Legislature that would make the same change. Under both proposals, “commercial cannabis activity” includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products, or acting as the holder of an adult-use on-site consumption license.
Key Takeaway for Cannabis Businesses
As the cannabis industry continues to expand, there is mounting pressure for legal cannabis businesses to be treated the same as other business entities under state and federal tax law. Those interested in the New York cannabis industry and the tax treatment of licensed entities should stay well attuned and contact a Scarinci Hollenbeck attorney with any questions.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact Dan McKillop, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
This article is a part of a series pertaining to cannabis legalization in New York, New Jersey and the United States at large. Prior articles in this series are below:
Disclaimer: Possession, use, distribution, and/or sale of cannabis is a Federal crime and is subject to related Federal policy. Legal advice provided by Scarinci Hollenbeck, LLC is designed to counsel clients regarding the validity, scope, meaning, and application of existing and/or proposed cannabis law. Scarinci Hollenbeck, LLC will not provide assistance in circumventing Federal or state cannabis law or policy, and advice provided by our office should not be construed as such.
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