New York City Cannabis Firms Poised to Get Full Tax Deductions

In a move long awaited by Empire State cannabis, the New York Senate approved legislation that would allow New York City cannabis business owners the full array of tax deductions already enjoyed by those businesses not considered by the federal government to be “trafficking in controlled substances.”

The bill, which is likely to pass, will apply to tax years beginning on or after Jan. 1, 2022. This adjusted filing will be to bring New York City in line with the state, which already allows cannabis businesses to add back disallowed expenses for state tax purposes.

New York City currently follows Section 280E of the tax code, which disallows all business deductions for cannabis companies other than cost of goods sold. Senate Bill 7508 would mean that for local New York City tax return preparation for years 2023 and after, cannabis businesses would be able to take all ordinary and necessary business expenses that are allowed for any other businesses and wouldn’t be subject to 280E.

The end result? Less tax.

Tax practitioners with clients in New York City should take special notice. For those cannabis companies that filed 2022 returns, most of whom have medical licenses, an amended tax return should be considered.

Section 280E recognizes cannabis as a Schedule 1 drug under the federal Drug Enforcement Agency’s Controlled Substances Act, which defines cannabis as having no accepted medical use and a high potential for abuse. In the unlikely event S7508 is rejected by the state assembly, New York City cannabis businesses would continue to be burdened with 280E at the local level and only be allowed those expenses related to cost of goods sold.

The tax returns for all three of New York City’s taxes start with federal net income: the unincorporated business tax, the general corporation tax, and the corporate tax of 2015, commonly referred to as the business corporation tax. If the new legislation passes, disallowed deductions such as selling, general, and administrative expenses would be recaptured.

For example, city income tax forms NYC-2 and NYC-202, Section B, Computation of Tax on Business Income Base, begins with the number: “Net profit (or loss) from business, farming or professions as reported for federal tax purposes.” The lost expenses would be entered on Line 19 of Section B, Other Subtractions.

The legislation, which was requested by New York City’s Department of Finance and filed by Sen. Luis R. Sepúlveda (D-Bronx), has strong support on both sides of the aisle. The state Senate approved the act last month with a vote of 43–18, and it now awaits passage by the assembly before being placed before Gov. Kathy Hochul (D) for signature.

When we reached out for an update to Sepúlveda’s director of communications, Rusking Pimentel, he commented, “Sen. Sepúlveda is very confident the governor will sign our legislation. Licensed cannabis businesses face many challenges, including unfair competition by unlicensed businesses. This act will help those cannabis businesses that do things the right way, so they can be more competitive.”

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rachel Wright, MST, CPA, a managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multi-national entities, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal, and international statutes of taxation.

Abraham Finberg MBA, CPA, a managing partner at AB FinWright, has worked in the cannabis sphere since 2009, counseling clients in all phases of business advisory and tax, from start-up through M&A and IPO.

Simon Menkes, CPA, supports AB FinWright’s clients and advisers through accounting and advisory services, and through writing professional articles.

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