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To great fanfare, New York State recently allowed cannabis operators to deduct business expenses on their state taxes. The move will likely save Empire State cannabis companies – already operating at a disadvantage due to marijuana’s Schedule I classification – tens to hundreds of thousands of dollars annually.

However, when Albany lawmakers altered the state tax code last year to allow these deductions, the changes didn’t apply to New York City’s cannabis businesses, said Elana Tamas, the cannabis group tax leader at Anchin, an accounting and advisory firm.

“New York State doesn’t speak for New York City – they’re separate,” Tamas said.

This disparity between state and city taxes revolves around the IRS code known as Section 280E. This federal tax policy prohibits businesses that traffic controlled substances on the Drug Enforcement Administration’s Schedule I or II lists – including cannabis – from writing off many business expenses on their taxes.

Section 280E is well known across the legal cannabis industry nationwide because it forbids state-licensed weed companies from writing off most business expenses. Under the policy, companies are allowed to write off items under the “cost of goods sold” category, which includes spending on items necessary to manufacture a product.

Under 280E, growers and processors may write off things like salaries of cultivation employees and rent paid for growing or processing facilities, said Tamas from Anchin.

But since retailers resell products – rather than produce them – they generally cannot write off line items like rent or most of their employee salaries, since these costs are not related to manufacturing a product.

Instead, weed businesses must eat the same costs that other businesses can deduct, which can amount to a staggering expenditure.

“The numbers are huge,” Tamas said.

Ironically, because the federal government categorizes marijuana as an illegal substance, one of the few items dispensaries are able to deduct from their taxes is money spent on their inventory: marijuana.

If the DEA reschedules cannabis to Schedule III – as the U.S. Department of Health and Human Services recommended – it would immediately make 280E moot for cannabis companies, Tamas said. But for now the tax regime applies to all legal plant-touching cannabis companies’ federal taxes.

Excerpted from the original article published by NY Cannabis Insider.