New York Proposal Would Allow Tax Deductions for Legal Weed Businesses
The IRS prohibits weed businesses from taking federal tax deductions, but the Empire State's new budget would at least let local pot companies reduce their state tax bills.
Published on April 14, 2022

New York lawmakers have amended the state's latest budget proposal to include a small but welcome tax break for legal weed businesses.

After weeks of tense negotiations with Gov. Kathy Hochul, the state legislature finally signed off on a $220 billion budget bill that will fund the Empire State for the 2022 fiscal year. The massive new bill contains a wide variety of controversial budget boosts and cuts, but it also includes a provision that would allow state-licensed cannabis businesses to take tax deductions for common business expenses. 

The IRS allows practically any American business to deduct a wide variety of expenses from their taxes each year. But in the early 1980s, tax officials implemented 280E, a new tax code that specifically prohibits any company dealing with Schedule I or II drugs from taking business deductions. Cannabis is still classified as a Schedule I drug, so this code forces weed businesses to pay taxes based on their total gross income, with no deductions allowed.

This extreme tax hit ends up getting redoubled on the state level, even in states where weed is legal. State tax laws generally mirror federal tax codes, so weed businesses must also cough up state taxes on their full, unmodified income. New York's new budget law would buck this trend by allowing licensed adult-use companies to deduct relevant business expenses from their state taxes.

On top of this excessive business tax burden, adult-use states also hit cannabis businesses with a wide variety of additional taxes and licensing fees, making it even harder for them to turn a profit. New York tax officials are already predicting that the state's new adult-use market will bring them an additional $1.25 billion in annual tax revenue once it fully matures.

If the governor signs the bill into law, this provision could potentially save the state's legal weed businesses millions of dollars a year. The new tax rule would retroactively take effect starting on January 1, 2022, allowing companies to take these deductions for the entire calendar year. Of course, the state bill will not change the IRS tax code, so pot companies will still be blocked from deducting expenses on their federal taxes.

Last year, Missouri lawmakers passed a similar bill that would allow state-licensed medical marijuana companies to deduct business expenses from their state taxes. Gov. Mike Parson (R) ended up vetoing the bill for unrelated reasons, however, making New York the only state to offer this tax reprieve to its weed industry. Federal lawmakers have also proposed dozens of bills that would resolve the issue by reforming tax and financial laws or even legalizing cannabis entirely, but none have yet to succeed

Easing the cannabis industry's tax burden would also help smaller, minority-owned pot companies compete with larger corporations. New York's adult-use law reserves 50% of all cannabis licenses for social equity applicants, and the new budget bill will establish a $200 million fund to help these applicants finance and plan their new cannabis ventures.

Chris Moore
Chris Moore is a New York-based writer who has written for Mass Appeal while also mixing records and producing electronic music.
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