The New Jersey governor has signed into law a bill that allows licensed marijuana businesses to claim certain expenses in their state tax returns. This is a partial solution, as the industry remains blocked from federal deductions due to Internal Revenue Service code 280E.
Gov. Phil Murphy (D), without any formal ceremony, signed the bill from Assemblymember Annette Quijano on Monday. The measure was approved by the legislature with some amendments about three months ago.
The legislation states that New Jersey’s tax law does not follow federal tax laws. Instead, it follows the New Jersey tax code. Gross income of a cannabis-licensed business is “determined without regard to Section 280E [of the] Federal Internal Revenue Code.”
The IRS 280E code will continue to apply to these businesses, which means that they cannot claim any tax deductions for illegally selling Schedule I or II drugs. The licensed cannabis industry in New Jersey will receive some state-level relief under the New Jersey legislation.
It states that the legislation Murphy has signed will apply to tax years beginning after January 1, following its enactment.
New Jersey Cannabis Trade Association: “The continued implementation 280E has placed severe financial restrictions on cannabis operators of all sizes, as it prohibits them from deducting their common business expenses from taxes.” New Jersey’s licensed marijuana operators will now be treated the same as any other legal business in New Jersey. This will bring a sense normality to our industry.
— New Jersey Cannabis Trade Association (@njcannabistrade) May 8, 2023
An analysis of the bill released in 2011 found that it would have mixed economic effects.
The decoupling of the federal 280E policies is expected to result in “an indeterminate loss of annual revenue” for the State because marijuana businesses will be eligible for tax relief that they pay currently.
The Office of Legislative Services said, “Providing these deductions and credit may also help generate greater economic activity among cannabis businesses.” Therefore, “State and local governments who tax cannabis businesses could indirectly realize an undeterminable amount of additional revenue each year.”
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New Jersey is not the only state working to overcome the unique financial challenges the cannabis industry faces due to federal prohibition.
For example, lawmakers in Iowa New York Pennsylvania Virginia and Virginia also pursued similar tax reliefs for their respective marijuana markets.
Last month, Rep. Earl Blumenauer of Oregon (D) reintroduced , a bill that would amend IRS code in order to allow marijuana businesses that are legalized by state to take advantage of federal tax deductions available to other companies.
He told Marijuana Moment he is “absolutely certain that when we can fully deduct the business expenses of people that actually there will be more revenue collected , because they will comply with the law.”
The marijuana industry is still facing tax policy challenges as a result of the prohibition. The Congressional Research Service (CRS), in a report from 2021, noted that IRS “has provided little tax guidance regarding the application of Section 280E.”
In a 2020 update, the IRS provided some guidance. It explained that, while cannabis businesses cannot take standard deductions for their gross receipts, 280E doesn’t “prevent a participant in marijuana industry from deducting its gross revenue by its correctly calculated cost of goods to determine its gross profit.”
The IRS update appeared to be in response to a Treasury Department Internal Watchdog Report released in 2020. IRS was criticized by the department’s inspector for tax administration for not adequately advising taxpayers in marijuana businesses about federal tax laws. It also directed the agency “to develop and publicize specific guidance for the marijuana industry”.
Since years, bipartisan and bicameral legislators have worked to pass legislation treating the cannabis sector as other legitimate businesses. This is through the Secure and Fair Enforcement Banking Act (SAFE), which has been recently re-filed in both chambers and that will be discussed at a Senate Committee hearing on Wednesday.
Senators push for Marijuana industry access to federal small business loans and services
The first time New Jersey governor signs bill to allow marijuana businesses to claim state tax deductions as a partial 280E workaround was published on Marijuana Moment.
