In NYC, Cannabis Business Expenses Now Deductible

New York Governor Kathy Hochul signed a bill on Friday, November 20, 2023, that allows New York City cannabis businesses to deduct business expenses paid or incurred in carrying on such business for purposes of determining their City income tax liabilities. The measure expands on legislation the governor signed in 2022 that allowed state-level cannabis income tax deductions, but New York City was not affected by that previous change.

Section 280E of the Internal Revenue Code prohibits businesses from deducting otherwise established ordinary and necessary business expenses from gross income associated with the “trafficking” of Schedule I or Schedule II substances, as defined by the Controlled Substances Act. Cannabis is currently declared a Schedule I substance. The rule applies to all businesses that partake in the cultivation, sale, or processing of the cannabis plant, for medical or recreational use.

The new legislation, S7508, allows businesses that are authorized to engage in the production, distribution, and sale of adult-use marijuana products or medical cannabis in the State to deduct their ordinary and necessary business expenses that are allowed for any other businesses when computing taxable income under New York City’s unincorporated business tax, the general corporation tax, and the business corporation tax, notwithstanding that such expenses are still prohibited as deductions to cannabis businesses at the federal level by section 280E.

New York joins a number of states with legal medical and recreation marijuana programs, that have decoupled their state tax codes from Section 280E to provide tax relief to legal cannabis operators. The measure takes effect immediately and will be retroactive to tax years beginning on or after January 1, 2022.