Tax deductions

New Cannabis Tax Deductions in New York

New York introduced a sizable tax break for cannabis businesses in its 2022 budget. The revenue bill included a state tax deduction for cannabis-related business expenses that are currently prohibited by law. section 280E of the federal tax code. We’ve seen this strategy in other ‘cannabis-friendly’ states and it’s a welcome development.

Under the proposed revenue bill, federal tax deductions prohibited by Section 280E of the Internal Revenue Code relating to “trafficking” in a Schedule I controlled substance may be taken into account in calculating net income. for tax purposes. Eligible expenses cannot have served as the basis for any other deduction, exemption or tax credit.

The wording of the Revenue Bill is an offshoot of S7518, introduced by New York Senator Jeremy Cooney, which would have had the same effect. As we noted in our S7518 review:

“The impact of the S7518 would be significant. By allowing cannabis businesses to deduct operating expenses at the state level, the legislation would allow them to operate as legitimate businesses in New York.

The same goes for the wording of the revenue bill. Section 280E of the Internal Revenue Code is a significant financial hurdle for cannabis businesses, as federal tax law prohibits cannabis businesses from deducting or crediting any pair of amounts or incurred in the course of operating cannabis. their business, apart from what can be captured in ‘costs of goods sold’. (You can read some of our other articles on the 280E section here, here, here, here and here).

It may seem like a dry bill, but it’s a big deal. The rationales of proposed S7518 apply here: allowing deductions promotes social fairness and a competitive business environment by reducing the cost of doing business. Presumably, large multi-state operators who can afford to pay the higher effective tax rate will have one less advantage in the impending New York market.