Rhode Island Governor Puts Marijuana Business Tax Deduction In Budget As Partial Federal 280E Workaround

The governor of Rhode Island is proposing to decouple state and federal tax policy for the marijuana industry as a partial workaround to the Internal Revenue Service (IRS) code known as 280E that bars cannabis operators from taking deductions for business expenses.

As part of his budget proposal for the 2025 fiscal year that was taken up by the House Finance Committee last week, Gov. Dan McKee (D) called for cannabis industry tax relief, with specific legislative language that he wants lawmakers to adopt.

“Rhode Island would join Massachusetts and Connecticut, and at least 10 other states, in decoupling from this federal policy” that prevents tax deductions for businesses that work with Schedule I and Schedule II drugs under the Controlled Substances Act (CSA), the executive budget summary says.

The governor’s office estimates that the reform would save marijuana businesses $824,642 in Fiscal Year 2025 and $1.7 million in Fiscal Year 2026.

The proposed text of the legislation says that state-licensed cannabis businesses would be able to take tax deductions in “the amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed under 26 U.S.C. § 280E.”

Rhode Island Cannabis Control Commission (CCC) Chair Kim Ahern attended last Thursday’s House Finance Committee meeting to support the marijuana tax relief language. Members heard from state officials on the overall budget proposal, but they did not vote on it.

ICYMI: CCC Chair Kim Ahern attended yesterday’s House Finance hearing in support of proposed changes to allow #RIcannabis businesses to deduct ordinary business expenses from taxable income.   If approved, the changes are expected to save businesses $800k in FY2025.

— RI Cannabis Control Commission (@Cannabis_RI) February 16, 2024

As the governor’s office noted, a multitude of other states have already moved to enact marijuana industry tax policy reform as a workaround to the IRS code, which has forced cannabis businesses to pay significantly higher effective tax rates compared to other traditional markets.

That state-level effort is continuing in 2024, with lawmakers in other states such as Florida proposing to level the playing field by extending tax deduction opportunities to their state cannabis markets.

Industry stakeholders are also holding out hope that the underlying issue with IRS code 280E will be addressed this year, pending a possible rescheduling action to move marijuana to Schedule III under the CSA, as the U.S. Department of Health and Human Services (HHS) has recommended to the Drug Enforcement Administration (DEA).

At the congressional level, Rep. Earl Blumenauer (D-OR) reintroduced a bill last May that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.

For the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And as the Congressional Research Service (CRS) noted in a 2021 report, IRS “has offered little tax guidance about the application of Section 280E.”

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IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

Back in Rhode Island, recreational marijuana purchases smashed the state’s monthly record in December, with more than $7.8 million in adult-use sales and patients buying another $2.4 million worth of medical cannabis products.

Meanwhile, lawmakers on Rhode Island’s House Judiciary Committee considered a bill earlier this month that would effectively legalize psilocybin mushrooms in the state, temporarily removing penalties around possession, home cultivation and sharing of psilocybin until mid-2026.

Also, harm reduction advocates in Rhode Island announced this month that they’ve secured a location for the nation’s first state-regulated overdose prevention center where people can use illegal drugs in a safer environment under the supervision of trained professionals.

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