New York 280E Decoupling Guide: What NY Cannabis Operators Can Deduct Now (2026)

By Daniel Sabet · Cannabis CFO & Financial Advisor, GreenGrowth CPAs · 280E, Tax Strategy & Growth Planning · Los Angeles, CA  |  Updated 2026  |  New York Cannabis Tax

New York cannabis operators have access to three separate layers of 280E relief in 2026, and most are not fully capturing all three. New York State decoupled from federal 280E in April 2022, retroactive to January 1, 2022. New York City followed in November 2023 with its own decoupling law, also retroactive to January 1, 2022. At the federal level, the April 2026 rescheduling order extended 280E relief to qualifying medical cannabis operators for the full 2026 tax year. Each layer operates under different rules, covers different tax returns, and affects different groups of operators. Consequently, a New York cannabis business that understands all three layers files materially different tax returns than one relying on outdated or incomplete guidance.

New York 280E Decoupling: At a Glance

Key Facts for Every NY Cannabis Operator

• NYS decoupling: Signed April 9, 2022. Retroactive to January 1, 2022. All NYS-licensed cannabis businesses (medical and adult-use) can deduct ordinary business expenses on their New York State return.
• NYC decoupling: Signed November 17, 2023. Retroactive to January 1, 2022. Covers the NYC Unincorporated Business Tax (UBT), General Corporation Tax (GCT), and Business Corporation Tax (BCT). All NYC-licensed cannabis businesses qualify.
• Federal layer (2026): The April 22, 2026 rescheduling order extends 280E relief to qualifying state-licensed medical cannabis operators on their federal return. Adult-use operators remain subject to federal 280E.
• Key distinction: NYS and NYC decoupling cover both medical and adult-use licensees. Federal relief covers only qualifying medical operators as of April 2026.
• Common mistake: Operators capturing the NYS deduction but not the NYC local deduction, or filing NYC local returns without the 280E decoupling adjustment since 2022.
• GreenGrowth's role: We prepare and review NY cannabis tax returns at all three levels, identify prior-year overpayments, and implement the correct filing position going forward. Book a CFO Discovery Call →

What Is Section 280E and Why Does It Hit Cannabis Businesses So Hard?

IRC Section 280E was enacted in 1982 after a federal court allowed a drug dealer to deduct business expenses. Congress responded by blocking deductions for any business that "traffics in controlled substances" under Schedule I or II of the Controlled Substances Act. Cannabis falls under Schedule I. Therefore, regardless of state licensing status, cannabis businesses cannot deduct ordinary business expenses on their federal return. The only exception is cost of goods sold under IRC Section 471, which reduces gross income directly.

The Real Tax Impact on NY Operators

For a typical New York cannabis dispensary, the result of 280E is an effective federal tax rate far above what any comparable retailer pays. Rent, payroll, utilities, marketing, and professional fees are all non-deductible at the federal level. A dispensary generating $2 million in revenue with $700,000 in COGS and $800,000 in operating expenses ends up paying federal tax on $1.3 million of income, not $500,000. At a 35% rate, that difference costs over $280,000 in extra federal taxes annually. However, at the New York State and New York City levels, that same dispensary can now deduct the full $800,000 in operating expenses. The state and city tax burden is therefore dramatically lower than the federal burden.

When Did New York Decouple From 280E and What Exactly Changed?

New York's decoupling from 280E happened in two steps. State-level relief came first. City-level relief followed eighteen months later.

Layer 1: New York State -- April 2022

Governor Hochul signed New York's 2022-2023 budget bill on April 9, 2022. This bill included a specific provision decoupling NYS from IRC Section 280E, codified as subparagraph (23) of paragraph (a) of subdivision 9 of Section 208 of the Tax Law. Both adult-use and medical operators qualify. Crucially, the effective date is retroactive to January 1, 2022, meaning NYS deductions are available from the start of the first full year New York's adult-use market began to operate.

In practice, NYS-licensed cannabis businesses calculate their New York State taxable income by adding back any deductions that federal 280E disallowed. Ordinary business expenses such as rent, employee wages, marketing, utilities, and professional fees are all deductible on the NYS return. Consequently, the state effective tax rate for NY cannabis operators is much closer to what a standard retailer pays.

Layer 2: New York City -- November 2023

The 2022 NYS decoupling did not automatically affect New York City's local taxes. NYC has its own tax code, and state-level changes do not flow through to city-level returns without separate action. Notably, NYC had previously required cannabis businesses to start their city taxable income calculation from federal taxable income, which meant 280E disallowances carried over to the city return even though the state return had already decoupled.

On November 17, 2023, Governor Hochul signed legislation specifically decoupling New York City from Section 280E. The law amends the Administrative Code of the City of New York to allow cannabis businesses to deduct, for purposes of the UBT, GCT, and BCT, any federal deduction disallowed by IRC Section 280E. Additionally, the law is retroactive to tax years beginning January 1, 2022. This means NYC cannabis operators have been entitled to city-level deductions going back to 2022, though many are still not claiming them correctly.

What Business Expenses Can NY Cannabis Operators Deduct at the State Level in 2026?

On the New York State return, any ordinary and necessary business expense that would be deductible under federal tax law but for 280E is now deductible. In other words, NY cannabis operators start from the same expense base as any other NY business for state tax purposes. The 280E disallowance simply does not apply.

The Full List of Deductible Expenses on the NYS Return

Rent and occupancy costs for all facilities, including retail floor space, are fully deductible. Additionally, employee wages and payroll taxes for retail staff, who are non-deductible federally under 280E, qualify without restriction. Marketing and advertising expenses, utilities, insurance, professional fees, and general administrative costs all apply. Furthermore, depreciation on equipment and leasehold improvements, Section 179 and bonus depreciation elections, and retirement plan contributions for owners and employees are all available on the state return.

Why the NYS Rate Looks So Different From the Federal Rate

A NY cannabis dispensary with $800,000 in annual operating expenses can deduct all $800,000 on its state return, regardless of whether those expenses relate to retail or production activities. The federal COGS-only restriction does not apply at the state level. This is precisely why the effective state tax rate for a NY cannabis operator looks much closer to that of a standard retailer than the federal effective rate does.

How Is NYC 280E Decoupling Different From NYS Decoupling?

The NYC decoupling covers three specific local taxes that NYC imposes on business income. Understanding which tax applies to your business structure is essential for filing correctly.

The Three NYC Taxes Now Decoupled From 280E

Unincorporated Business Tax (UBT): Applies to partnerships, LLCs treated as partnerships, and sole proprietors doing business in NYC. For cannabis dispensaries structured as LLCs or partnerships, the UBT is the primary NYC income tax. The 280E decoupling allows UBT filers to deduct any amount that was disallowed federally due to 280E.

General Corporation Tax (GCT): Applies to general business corporations operating in NYC for tax years through 2023. After 2023, the GCT was largely merged into the BCT for most filers. However, the decoupling applies to any open GCT year still under review.

Business Corporation Tax (BCT): The primary NYC corporate income tax for most C-corps and S-corps operating in NYC. Cannabis businesses structured as corporations file BCT returns and can now deduct 280E-disallowed expenses on those returns, retroactive to 2022.

How the Deduction Works on NYC Returns

For all three taxes, the deduction equals the amount that would otherwise be disallowed under federal 280E. Mechanically, the city return works the same way as the NYS return: start from federal taxable income and add back the 280E-disallowed amounts. As a result, both the state and city returns reflect the full, deductible expense base rather than the federally-restricted base. For a comprehensive review of your New York cannabis accounting position across all three levels, our team handles each return type.

What Does Federal Schedule III Rescheduling Mean for NY Operators in 2026?

On April 22, 2026, the DOJ order moved state-licensed medical cannabis from Schedule I to Schedule III, which means federal 280E no longer applies to qualifying medical operators from that date. Treasury has announced that forthcoming guidance will apply this relief to the full 2026 tax year. As a result, qualifying NY medical operators gain a third layer of deductibility, this time on the federal return.

What Changes and What Does Not

For qualifying NY medical cannabis operators, 2026 represents the most favorable tax environment in the history of the state's legal cannabis industry. All three returns, federal, NYS, and NYC, now support ordinary business expense deductions. Furthermore, the full-year transition rule means the federal relief applies retroactively to January 1, 2026 for calendar-year filers under the announced guidance.

Adult-Use Operators: No Federal Change

For NY adult-use operators, however, nothing changes at the federal level. Federal 280E still applies in full. State and city returns continue to provide significant relief, but the federal burden remains unchanged. Adult-use operators should maintain current federal 280E planning and compliance under existing law while monitoring the DEA hearing outcome, which could eventually extend Schedule III status to adult-use operations. For a full review of how these layers interact for your specific entity, our cannabis tax planning services team works through this analysis for NY operators across all license types.

How Should NY Dispensaries and MSOs Adjust Their Tax Planning Now?

The three-layer structure of NY 280E relief requires three separate planning actions, each corresponding to a different return and a different set of rules.

Action 1: Audit Your NYS and NYC Returns Back to 2022

Both NYS and NYC decoupling are retroactive to January 1, 2022. Operators who did not immediately adjust their state and city returns may therefore have overpaid in prior years. Review your NYS returns for tax years 2022, 2023, 2024, and 2025 to confirm the 280E add-back was applied correctly.

Check the Statute of Limitations for Open Years

Similarly, review your NYC UBT, GCT, or BCT returns for the same years. Generally, the statute of limitations for amending prior-year returns runs three years from the original filing date, so most 2022 and 2023 years remain open for many filers. Act before those windows close.

Action 2: Recalculate 2026 Estimated Payments at All Levels

For qualifying NY medical operators in particular, the 2026 estimated payment picture has changed at all three levels simultaneously. On the federal return, payments should reflect the expected post-280E rate under Treasury's announced transition rule. State and city payments should already reflect decoupling, but recalculate them if any prior estimate used the pre-decoupling rate. Overpaying estimated taxes at any level locks cash with the taxing authority unnecessarily. Notably, September 15 is the next Q3 action date for federal estimated payments.

Action 3: Update Your Chart of Accounts and Tax Projection

Your accounting system should track expenses in a way that supports all three reporting layers. For NY adult-use operators, this means maintaining COGS versus SG&A separation for federal 280E purposes while ensuring those same SG&A amounts are captured as deductible on the state and city returns. For NY medical operators in 2026, this additionally means implementing the federal deductibility reclassification and updating the tax projection to reflect it. A chart of accounts designed for this three-layer structure from the start is far easier to maintain than one retrofitted after the fact.

Frequently Asked Questions