New Jersey Gov. Phil Murphy signed a law on Monday to end the state’s unfair tax treatment of cannabis businesses.
The legislation, written by the New Jersey Society of CPAs Cannabis Interest Group, decouples cannabis businesses from federal Internal Revenue Code Section 280E and creates a level playing field for cannabis businesses in the state.
Section 280E prohibits many cannabis companies from deducting business expenses on personal or corporate income tax returns. This has cut into profits and caused companies to look like they have more losses than other businesses. It also creates a higher tax bill than for noncannabis companies.
“NJ has joined the short list of other states that have provided a much-needed offset to the onerous 280e tax that is crippling many operators in cannabis, large and small,” said Morgan Paxhia, co-founder and managing partner of Poseidon Investment Management. “It is great to see NJ recognizing the deleterious impacts of the 280E tax code and providing some relief while we wait for the federal government to catch up. … Capital flows to where it is treated best and that is true with legal cannabis states and their subsequent tax rates.”
The legislation A-3946/S-340 read as follows, “As amended, this bill decouples the corporation business tax from the federal income tax provision that prohibits deductions and credits for cannabis businesses. The bill also decouples S corporation income under the gross income tax from the federal provision. … As a result of enactment of this bill, a business subject to the corporation business tax will be allowed to deduct from income all ordinary and necessary business expenses incurred in carrying on a licensed cannabis business.”
The new law applies to tax years beginning on and after Jan. 1, 2023. Prior to the signing of this legislation, New Jersey’s tax structure “piggybacked” on 280E, according to NJCPA, thus taxing cannabis business owners like drug dealers, including those who operate in the medicinal space.
“280E has been plaguing this industry for too long, and hard-working entrepreneurs deserve the ability to deduct the same business-related expenses that all other companies are entitled to,” Matt Hawkins, founder and managing partner of Entourage Effect Capital, said. “I would like to see lawmakers in all legal states adopt similar bills, although real change will require comprehensive banking reform at the federal level.”
In addition, the legislation also removes the $15 million cap on revenue to qualify for “deductions and credits for ordinary and necessary business expenses incurred in carrying on a licenses cannabis business.”