April 19, 2022

Maryland Enacts Law Allowing Maryland Income Tax Subtraction Modification for Medical Cannabis Trade or Business Expenses

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Generally, the federal government taxes income from any source—even if such income is derived from illegal activity. Under a nearly three-decades old federal law, marijuana is still considered an illegal drug at the federal level; accordingly, the IRS prohibits deductions for expenses paid or incurred in the operation of any business that consists of trafficking in illegal drugs.¹ This means that in Maryland, where medical cannabis businesses are legal, licensees have been unable to write off their normal and usual business expenses on their taxes—placing them on unequal footing with other Maryland businesses. Recently, Maryland has enacted tax legislation to better address this inequitable tax position and more accurately reflect current policy in the state.

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On April 9, 2022, the Maryland General Assembly enacted a new Cannabis Reform law impacting medical cannabis for corporate income, individual income and excise tax purposes. Significantly, the new law provides a subtraction modification under the Maryland income tax for: 

certain expenses paid or incurred during the taxable year in carrying on a trade or business as a certain medical cannabis grower, processor, dispensary, or independent testing laboratory; and generally relating to cannabis.²

Notably, the “subtraction permitted includes a reasonable allowance for salaries or other compensation for personal services actually rendered.”³ And as further explained in the Fiscal and Policy note, “[t]he subtraction modification may be claimed if the deduction for ordinary and necessary expenses is disallowed under Section 280E of the Internal Revenue Code.”⁴ Finally, the Fiscal and Policy note also clarifies that that the subtraction modifications may be claimed beginning in tax year 2022.⁵ 

Contact our team today at (410) 497-5947 or schedule a confidential consultation to discuss this tax modification for your trade or business.

Footnotes

  1. IRC §280E
  2. H.B. 837, became law without signature 04/09/22. You can read the full bill as passed at: https://mgaleg.maryland.gov/mgawebsite/Legislation/Details/hb0837.
  3. Id.
  4. House Bill 837 (Md. 2022), Revised Fiscal and Policy Note at 4 and 5. You can read the entire Fiscal and Policy Note at: https://mgaleg.maryland.gov/2022RS/fnotes/bil_0007/hb0837.pdf.
  5. More specifically, the provision is applicable to all taxable years beginning after December 31, 2021.
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