News Summary
Since early 2024, state-licensed cannabis companies in New York and across the U.S. have started to claim exemptions from Section 280E of the Internal Revenue Code. This move may save the industry billions in tax liabilities. Companies like Curaleaf Holdings and Trulieve Cannabis are reporting significant financial benefits, highlighting the importance of tax savings amid challenging federal regulations on marijuana. However, the increased IRS scrutiny on these claims raises concerns about future audits and potential penalties, which could impact operational sustainability for many businesses in the cannabis sector.
New York City – Since early 2024, state-licensed cannabis companies in New York and across the United States have started claiming exemption from Section 280E of the Internal Revenue Code, a move that has the potential to save the industry billions in tax liabilities. The change comes as these companies grapple with the high tax rates associated with federal restrictions on marijuana.
Section 280E, enacted in 1982, restricts businesses that deal in Schedule I or II controlled substances from claiming standard deductions, effectively imposing tax rates that can soar between 70% and 90%. This has created significant financial burdens, forcing many legal marijuana businesses into net losses. For instance, Curaleaf Holdings Inc. reported a staggering net loss of $222 million last year, primarily due to taxes imposed by this rule.
Estimates suggest that the cannabis industry’s shift towards claiming exemptions under Section 280E has resulted in savings totaling in the billions nationwide over the past year. Companies like Trulieve Cannabis Corp. and Verano Holdings Corp. have reported substantial financial benefits. Trulieve was the first to submit amended tax returns from 2019 to 2021, which led to a successful refund claim of $115 million from the IRS. Meanwhile, Verano Holdings highlighted savings of $177.5 million after claiming the exemption.
The effective tax rate under Section 280E can be exceptionally high, especially for companies that are not profitable, leading some to face tax obligations on “phantom income”. In light of these burdens, many companies have viewed tax savings from the exemption as essential for maintaining operations amid federal restrictions on cannabis business practices. CFOs across the industry are optimistic about the cash flow implications of these savings. For instance, Cresco Labs noted a $73.9 million increase in net cash from operations linked to their tax position on 280E.
A pivotal factor in the push for claiming exemptions has been a federal lawsuit led by the New York law firm Boies Schiller Flexner LLP, which has provided legal impetus for companies to challenge Section 280E. The IRS has warned businesses attempting to reclaim funds related to this section may face rejection, and scrutiny of recent claims has begun. Companies that are now seeking the exemption are aware that this could lead to potential audits and financial penalties in the future.
As an exception, Green Thumb Industries Inc. stands out for consistently paying its entire Section 280E tax bill without pursuing exemptions, indicating a diverse range of strategies within the industry regarding compliance and tax planning.
Further complicating the situation, many companies that have filed for the exemption may encounter audits, with the IRS increasingly focusing on these claims. Tax experts input that while the adoption of exemptions provides short-term financial relief, it may also introduce long-term risks due to possible future IRS audits and penalties.
Legal interpretations surrounding Section 280E exemptions vary widely, with discourse revolving around the implications of the 16th Amendment and the Constitution’s Dormant Commerce Clause. Should marijuana be rescheduled under federal law, these issues could be resolved, as currently marijuana remains classified as a Schedule I controlled substance.
Recent legislative moves in New York City support cannabis businesses further, allowing them to deduct expenses from local taxes, a shift that mirrors actions taken by other states aiming to bolster the industry’s sustainability. This new framework may provide vital financial backing for operational costs, with capital costs being lower than conventional borrowing options.
As such, industry experts are closely monitoring the trend toward claiming 280E exemptions, anticipating that it could leave a significant mark on the cannabis sector, depending on the IRS’s future actions and legal challenges created by these ongoing adaptations.
Deeper Dive: News & Info About This Topic
HERE Resources
Additional Resources
- Crain’s New York: NY Cannabis Businesses Embrace 280E Tax Exemption
- CBIZ: New York City Allows Cannabis Operators to Deduct Expenses
- MJBizDaily: Marijuana MSOs Set Up High-Risk Fight with IRS over 280E
- Wolters Kluwer: NY Cannabis Industry Will Get 280E Tax Relief
- Wikipedia: Section 280E
Author: STAFF HERE NEW YORK WRITER
NEW YORK STAFF WRITER The NEW YORK STAFF WRITER represents the experienced team at HERENewYork.com, your go-to source for actionable local news and information in New York, the five boroughs, and beyond. Specializing in "news you can use," we cover essential topics like product reviews for personal and business needs, local business directories, politics, real estate trends, neighborhood insights, and state news affecting the area—with deep expertise drawn from years of dedicated reporting and strong community input, including local press releases and business updates. We deliver top reporting on high-value events such as New York Fashion Week, Macy's Thanksgiving Day Parade, and Tribeca Film Festival. Our coverage extends to key organizations like the Greater New York Chamber of Commerce and United Way of New York, plus leading businesses in finance and media that power the local economy such as JPMorgan Chase, Goldman Sachs, and Bloomberg. As part of the broader HERE network, including HEREBuffalo.com, we provide comprehensive, credible insights into New York's dynamic landscape.
