NYC CONSIDERS ABOLISHING 280E CONFORMITY
As New York state’s adult-use cannabis industry begins to pick up steam, the eyes of many savvy entrepreneurs are focused on the tax burden foisted on these businesses by Section 280E of the Internal Revenue Code. While New York state allows cannabis businesses the same deductions as any other business, New York City still follows the federal government and restricts deductions to Cost of Goods Sold. This may be about to change.
New York City and 280E
A few days ago, 420CPA (AB FinWright LLP) reached out to the legal division of the City’s tax department and requested an update on 280E. We received the following response: “Currently, the city follows the federal treatment. [However] the city is considering legislation to follow New York State and allow taxpayers that are licensed or otherwise authorized to engage in cannabis activities to take these federally disallowed deductions.”
Needless to say, this greatly excites us on behalf of our New York clients.
Section 280E Recap
Section 280E of the Internal Revenue Code disallows deductions and credits for expenditures connected with the illegal sale of drugs, requiring most cannabis businesses to add back such significant expenses as rent and wages for sales staff when calculating their federal income tax. 280E makes it far more difficult for cannabis businesses to be profitable.
No Section 280E With New York State
By signing the 2022-2023 state budget into law, New York Governor Kathy Hochul also enacted Senate Bill S8009, freeing state cannabis taxpayers from the onerous effects of federal Internal Revenue Code Section 280E, starting as of January 1, 2023.
Per S8009, “THE AMOUNT OF ANY FEDERAL DEDUCTION DISALLOWED PURSUANT TO SECTION 280E OF THE INTERNAL REVENUE CODE RELATED TO THE PRODUCTION AND DISTRIBUTION OF ADULT-USE CANNABIS PRODUCTS … TO BE ADDED BACK … IN COMPUTING ENTIRE NET INCOME.
New York City Still Follows 280E
New York City’s Department of Finance hasn’t yet caught up with the state, and city cannabis taxpayers still have to file their city tax returns conforming to Section 280E. Section B, Computation of Tax on Business Income Base, in city income tax forms NYC-2 and NYC-202, still begins with the starting number: “Net profit (or loss) from business … as reported for federal tax purposes,” which by definition includes Section 280E.
This stance appears to be counter to state law. As we noted in our Bloomberg.com article, New York state law spells out that “the city taxable income of a city resident individual shall mean and be the same as his or her New York taxable income,” which suggests the city is out of compliance with state law.
Contact Your Reps to Make the Change
The fact that New York City is considering leaving 280E is significant and exciting news for those cannabis businesses which are filing New York City income taxes. We strongly encourage New York City cannabis entrepreneurs to contact Mayor Eric L. Adams, their council representatives, and their borough presidents and express support for such an important change.
- New York Senate Bill S8009, Part PP, Section 1, https://www.nysenate.gov/legislation/bills/2021/S8009
- NYC-202, Schedule B, Part 1, https://www1.nyc.gov/assets/finance/downloads/pdf/21pdf/business_tax_forms/nyc-202_2021.pdf
- N.Y. Tax Law § 1303.