The governor of New Jersey has signed a bill into law that will allow licensed marijuana businesses to deduct certain expenses on their state tax returns—a partial remedy as the industry continues to be blocked from making federal deductions under Internal Revenue Service (IRS) code known as 280E.
Gov. Phil Murphy (D) signed off on the legislation from Assemblymember Annette Quijano (D) on Monday, without a formal ceremony. This comes about three months after the legislature approved the measure with amendments.
A New Jersey Senate committee approved a pair of bills on Thursday that would allow licensed marijuana businesses to deduct certain expenses on their state tax returns, a partial remedy as the industry continues to be blocked from making federal deductions under Internal Revenue Service (IRS) code known as 280E.
The Senate Budget and Appropriations Committee took up companion measures from its chamber and from the Assembly, making them identical before advancing them in a unanimous vote.
Legislation written by the NJCPA Cannabis Interest Group (A3946) that would end New Jersey's unfair tax treatment of cannabis businesses was passed by the Assembly Oversight, Reform and Federal Relations Committee on Sept. 29, 2022.
Internal Revenue Code (IRC) Section 280E forbids companies engaged in illegal drug activities from deducting business expenses. New Jersey piggybacks on this provision, in effect treating cannabis companies as if they are engaged in illegal drug trafficking.
New Jersey's Cannabis Regulatory Commission has had the somewhat unenviable task of overseeing the debut of recreational-use marijuana sales in the state, but after three months some areas of concern are emerging.
And there don't seem to be ready-made answers, according to Todd Polyniak, who leads the cannabis practice for Parsippany-based firm Sax, LLC and works with clients who have applied for recreational retail licenses.
That’s why the New Jersey Society of CPAs (NJCPA) supports legislation (S3240) introduced in December by Senator Troy Singleton (D-7) that would decouple New Jersey from §280E for businesses with less than $15 million of gross receipts. While we would prefer decoupling for all cannabis businesses, it is most important for small businesses, many of which are minority- and women-owned. Larger operators generally have enough cash on hand to withstand the drain on profits that §280E will cause in initial years, but smaller businesses often do not.
Everyone needs to pay their fair share of taxes, including the cannabis industry. But there is nothing fair about how the federal government treats cannabis under an outdated provision put into the Internal Revenue Service tax code decades ago. It’s fueling the underground market for weed and reducing the tax revenues the federal government should collect.
Even though legislation to legalize adult-use cannabis in New Jersey has stalled, there is still a vital tax issue that needs to be resolved. It is crucial that the state decouples from the federal law governing cannabis — Internal Revenue Code 280(E) — so that cannabis business owners will be able to deduct ordinary and necessary expenses in the same manner as their non-cannabis counterparts.
If adult-use cannabis is legalized in New Jersey, it is crucial that the state decouples from the federal law governing cannabis — Internal Revenue Code 280(E) — to have a viable cannabis industry. As it stands, the federal provisions in IRS Code 280(E) make it impossible for cannabis business owners to receive a tax benefit for any of their operating expenses due to cannabis’ status as a federally controlled substance. This creates an immense challenge to the cash flow of cannabis operations in the United States.