Decoupling of Section 280E from State Tax Codes
On May 18, 2022, in a 153-2 vote, the Massachusetts House of Representatives voted to amend the state’s tax code to provide income tax relief for Massachusetts cannabis businesses. The Massachusetts House and Senate will go through a conference committee process before both chambers vote on a final bill, which would then be sent to the Governor’s desk for signature. If passed in its current form, Massachusetts would decouple its tax code from Section 280E of the Internal Revenue Code, which denies most deductions to cannabis businesses.
Internal Revenue Code Section 280E provides that no deduction or credit shall be allowed for any trade or business consisting of trafficking in controlled substances prohibited by Federal law or the law of any State in which such trade or business is conducted. Because cannabis remains listed as a Schedule I controlled substance under the federal Controlled Substances Act, cannabis businesses are generally not permitted to deduct business expenses on their federal income tax returns. Currently, business deductions and credits are not permitted at the state level either, because Massachusetts uses federal taxable income as the starting point for calculating Massachusetts tax liability. The result of Internal Revenue Code Section 280E is that cannabis businesses incur a significantly higher effective tax rate than businesses in most other sectors.
The pending bill would allow Massachusetts cannabis businesses to deduct business expenses for purposes of determining Massachusetts taxable income, potentially resulting in significant tax savings. If passed, Massachusetts would become one of a growing number of states to decouple from Internal Revenue Code Section 280E, including California, Colorado, Hawaii, Michigan, New York and Oregon.