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Tax & AccountingApril 13, 2022

New York’s Cannabis Industry Will Get 280E Tax Relief Under 2023 Budget

NYS 2023 Budget Provides Cannabis Businesses with 280E Exemption

New York State’s 2023 budget passed the legislature and was signed by Governor Hochul on April 9th. The budget includes a provision that will have major implications for the state’s adult-use cannabis industry, expected to take off before the end of 2022.

The law carves out an exemption from IRC Section 280E. This exemption would allow NYS-licensed cannabis businesses to take tax deductions for business expenses and claim credits at the state level that they are barred from utilizing on their federal returns.

Medical and adult-use cannabis companies across the U.S. are precluded from taking certain federal tax deductions under Internal Revenue Code section 280E. By decoupling the state tax code from the federal law for purposes of 280E, New York-licensed cannabis businesses would see significant tax savings beginning January 1st, 2023.

IRC Section 280E

Under 280E, businesses whose activities consist of “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act)” cannot deduct most business expenses from their federal taxes or receive tax credits. However, these businesses are still obligated to pay taxes like any other company.

Many states simply mirror federal tax policy in their own tax codes. Because of this, the federal tax code’s restrictions on cannabis businesses also blocks state-level deductions unless a state acts to exempt these businesses from these restrictions.

As a result, it is estimated that many cannabis businesses pay effective tax rates of up to 80%. To help resolve the issue, New York has joined California, Colorado, Oregon, and Massachusetts by amending its state statute by adding new sections to a list of exceptions for taxable entire net income and adjusted gross income.

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Mark Friedlich
Vice President of US Affairs for Wolters Kluwer Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the Vice President of US Affairs for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and has been a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a COO and Principal at PwC.

 

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