Illinois’ new budget includes provisions for cannabis companies

Illinois Gov. JB Pritzker recently signed a budget on June 7th that includes provisions for the cannabis industry, specifically the establishment of funds for cannabis companies and the ability to take tax deductions.

The fiscal year 2024 state budget bill includes the Cannabis Ordinance and Tax Act, which addresses issues that result in cannabis companies not being able to make Section 280E tax deductions. The newly signed state budget allows any licensed cannabis business to take tax deductions from its business in the amount of “…an amount equal to the deductions that were not permitted under Section 280E of the Internal Revenue Code for the tax year…” This new provision applies for tax years beginning January 1, 2023.

According to the National Cannabis Industry Association, section 280E arose out of a 1981 lawsuit involving a cocaine dealer who “asserted his right to deduct ordinary business expenses under federal tax laws.” The following year, section 280E was introduced to prevent that someone can take tax deductions if their trade involves controlled substances.

An Internal Revenue Service article written in September 2021 by Small Business/Self-Employed Examination Commissioner De Lon Harris examined the challenges 280E poses for cannabis businesses in Illinois and elsewhere. “While Section 280E of the IRS code clarifies that all deductions and credits are not allowable for an illegal business, there is a caveat: Marijuana business owners can deduct their cost of goods sold, which is essentially the cost of their inventory.” ‘ Harris wrote. “What is not deductible are the normal overheads, such as advertising expenses, wages and salaries, travel expenses, to name a few.”

Harris provided tips on how to know and trust investors, file and pay taxes on time, report cash transactions, and keep accurate records to comply with regulations. Later in December 2021, Harris attended a webinar where he further explained how to use the IRS as a law guidance resource. “It is truly our mission at the IRS, not just to the marijuana and cannabis industry, but to all taxpayers, to encourage voluntary compliance,” Harris said. “And that can be done in different ways. When most people think of the IRS they think of exams or audits and think that it’s the only way we can interact with taxpayers or try to encourage voluntary tax compliance, but we also do our fair share of Public Relations and Education.”

The fiscal year 2024 state budget bill also includes a provision to create the Cannabis Business Development Fund, which aims to assist cannabis business owners in Illinois. The fund would “make soft loans available to qualified social justice applicants” to fund expenses such as “starting and running” a cannabis company (and reimburse the Department of Commerce and Economic Opportunity for costs associated with those soft loans) . Grants). The fund would also fund outreach efforts aimed at attracting and supporting social justice applicants and research involving “minority, women, veteran or disabled people in the cannabis industry.” The provision concludes by adding that the State Controller will transfer $40 million from the Compassionate Use of Medical Cannabis Fund to the Cannabis Business Development Fund by July 1, 2023.

Illinois isn’t the only state trying to legislate to help cannabis companies with their tax predicament. On May 8, New Jersey Gov. Phil Murphy approved legislation to “decouple state tax regulations from the federal prohibition on deductions for cannabis companies.” On June 12, Connecticut Governor Ned Lamont also signed a biennial state budget that included provisions for 280E tax deductions.

The New York Senate also recently passed a bill providing tax breaks for cannabis companies. “This change in income is appropriate because, while expenses for cannabis-related businesses are not deductible for federal purposes, New York law permits and encourages these businesses as much as any other legitimate business in the state,” reads a draft law. “The city’s business taxes are also intended to encourage this business activity.”