17 June 2022
Foley Hoag LLP
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Key Takeaways:
- Massachusetts is on the brink of becoming the next member of a
growing number of states that are “decoupling” from
Section 280E, the federal tax law that severely limits the extent
to which cannabis-related businesses can deduct expenses for income
tax purposes. - If pending legislation is enacted, such limitations would not
apply for Massachusetts state income tax purposes, leading to
potential tax relief for Massachusetts cannabis-related
businesses.
Section 280E of the Internal Revenue Code provides that no
deduction or credit shall be allowed for any amount paid or
incurred in carrying on any trade or business if such trade or
business consists of trafficking in controlled substances listed on
Schedule I or II of the federal Controlled Substances
Act.1Cannabis currently is listed as a “Schedule
I” controlled substance for this purpose. Accordingly,
cannabis-related businesses have been (and remain) subject to
Section 280E. Many states, including Massachusetts, use a
taxpayer’s federal taxable income as the starting point for
calculating state taxable income. Accordingly, the effects of
Section 280E have carried over to Massachusetts and, effectively,
have prevented Massachusetts cannabis businesses from deducting
their ordinary and necessary business expenses from taxable income
for federal and Massachusetts income tax purposes (except to the
extent that any such expenses can be claimed as “cost of goods
sold,” which generally is much more limited in scope). As
noted above, the pending legislation would remove (or
“decouple”) Massachusetts from Section 280E for state
income tax purposes.
Specifically, the proposed Massachusetts law provides that, for
purposes of determining taxable income for Massachusetts income tax
purposes, a cannabis-related business that is subject to Section
280E for federal income tax purposes would be permitted to deduct
ordinary and necessary business expenses paid or incurred during a
taxable year that are non-deductible at the federal level due to
Section 280E. If enacted in its current form, the new law would be
effective for taxable years beginning on or after January 1,
2022.Accordingly, cannabis-related businesses could benefit from
this change retroactively.
Businesses already operating in Massachusetts stand to benefit,
while others considering a new or increased presence in
Massachusetts may consider moving certain business functions and
activities to the Bay State (although that decision would depend on
all relevant facts and circumstances, including general business
considerations, as well as the net effect of a reduced tax base
being exposed to Massachusetts’ relatively high 8% corporate
income tax rate). Cannabis-related businesses may have similar
considerations with respect to new or increased operations in other
states that have “decoupled” from Section 280E, including
California, Colorado, Hawaii, Michigan, New York and Oregon.
We are closely monitoring this new development in Massachusetts
and all other states.Please contact a member of Foley Hoag’s
Cannabis Practice Group if you would like assistance in determining
the effect of Section 280E “decoupling” with respect to
your business in Massachusetts and elsewhere.
Footnotes
1 21 U.S.C. § 801, et seq.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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