New Jersey in May became the 20th state to decouple IRC Section 280E from its state tax code, allowing cannabis businesses the same standard business deductions on state taxes as traditional industries.
The legislation, which was signed into law by Governor Phil Murphy, had broad bipartisan support in both houses of the New Jersey Legislature and will take effect immediately, applicable to the 2023 tax year.
New Jersey, like many states, links its state tax code to the Internal Revenue Code, including Section 280E, which forbids companies engaged in illegal drug activities from deducting business expenses, resulting in higher tax bills for cannabis companies.
Under the new law in New Jersey, a cannabis business subject to the corporation business tax will be allowed to deduct from income all ordinary and necessary business expenses associated with managing a licensed cannabis business, including the opportunity to qualify for research and development deductions. The deduction is also allowed when calculating the S corporation income of cannabis business corporations, and will continue to be allowed for other forms of business income under the gross income tax regardless of gross revenue.
“This law aims to level the playing field for all cannabis businesses,” Senate bill co-sponsor Troy Singleton said in a statement. “It will ensure that dispensaries are paying a fair amount of taxes by taking into account critical business expenditures and allowing these deductions from their income.”
The legislation was written in part by the New Jersey Society of Certified Public Accountants, who thanked Murphy, Singleton and House co-sponsor Rep. Annette Quijano for its passage.
“The continued implementation of 280E placed several financial constraints on cannabis operators, big and small, by prohibiting them from deducting common business expenses from their taxes,” the NJCPA said in a statement on LinkedIn. “Now, New Jersey’s licensed cannabis operators will be treated like any other legal enterprise operating in New Jersey, a sense of normalcy that our industry will cherish.”
Similar legislation is pending in Connecticut.
-Brian Beckley