New York City Allows Cannabis Operators to Deduct Business Expenses from Local Taxes

On November 17, 2023, Governor Kathy Hochul signed a bill that allows cannabis operators in New York City to deduct their business expenses from local taxes. This significant development provides tax relief to businesses engaged in the production, distribution, and sale of adult-use marijuana products or medical cannabis. The legislation amends the city’s tax code to decouple from section 280E of the Internal Revenue Code, which prohibits businesses from deducting ordinary business expenses related to the trafficking of Schedule I or II substances, including marijuana. This move brings New York City in line with other states that have decoupled from section 280E to support the legal cannabis industry.

New York now joins a growing number of states that have decoupled from section 280E in their state tax codes. By doing so, these states aim to provide tax relief to legal cannabis operators. This step is crucial for the growth and success of the legal cannabis industry, as it allows businesses to deduct their ordinary business expenses, ultimately reducing their tax burden.

280E of the Internal Revenue Code was enacted in 1982 as part of the War on Drugs. Its purpose was to disallow deductions for businesses engaged in the trafficking of controlled substances, including marijuana. This rule posed a significant challenge to cannabis businesses, as marijuana remains illegal under federal law despite its legalization in many states. Section 280E prevents cannabis businesses from deducting certain expenses. This limitation has been a major hurdle for cannabis operators, as they are unable to enjoy the same tax benefits as other businesses.

Previously, New York State allowed cannabis businesses to deduct state-level cannabis business taxes. However, New York City had its own tax laws that were not affected by that change. With the new legislation, New York City cannabis operators can now deduct their business expenses when computing taxable income under the city’s unincorporated business tax, the general corporation tax, and the business corporation tax. This change is retroactive to tax years beginning in January 2022, providing relief for past tax liabilities as well.

The signing of this bill by Governor Kathy Hochul marks a significant milestone for the cannabis industry in New York City. By decoupling from section 280E, cannabis operators can now deduct their business expenses, reducing their tax burden and allowing them to operate more efficiently. This move aligns New York City with other states that have taken steps to support the legal cannabis industry. As the industry continues to grow, it is crucial for more states to follow suit and provide tax relief to cannabis operators, fostering a thriving and regulated market.