New Jersey Allows Cannabis Businesses to Deduct Expenses on State Taxes

By Jelani Gibson, nj.com – (via TNS).

New Jersey Governor Phil Murphy has signed a bill into law that makes it possible for New Jersey cannabis businesses to deduct some expenses on state tax returns by decoupling them from federal rules.

Since cannabis is federally prohibited, cannabis businesses were not allowed to deduct expenses like normal businesses would (Section 280E of the IRS Tax Code). Under the new state law, the business subject to the corporation business tax will be allowed to deduct from income all ordinary expenses associated with managing a licensed cannabis business, including the opportunity to qualify for research and development deductions.

The measure was sponsored by state Sens. Troy Singleton, D-Burlington, and Shirley K. Turner, D-Mercer, and Assemblywoman Annette Quijano, D-Union.

“We have seen here in New Jersey, and around the country, that legal cannabis businesses tend to lack diversity both in gender and race amongst its ownership ranks. This law aims to level the playing field for all cannabis businesses,” Singleton said in a statement shortly after the bill became law. “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’s language was largely influenced by the Cannabis Interest Group of the New Jersey Society of Certified Public Accountants

“We applaud the initiative and efforts taken by bill sponsors Assemblywoman Annette Quijano and state Sen. Troy Singleton,” Ralph Albert Thomas, NJCPA executive director, said in the wake of the bill’s passage. “They quickly recognized the importance of addressing this little-understood but critically important issue and tirelessly pushed for its passage.”

Stacey Udell, an accountant at HBK Valuation with many clients in New Jersey’s nascent legal market, said the new law will offer much needed relief.

“Decoupling provides a much needed tax break to plant-touching cannabis businesses by enabling them to deduct all cost of operating for state tax purposes,” she said. “It means cannabis businesses will be treated like non-cannabis businesses … the way it should be.”

The bill was also lauded by the state’s two largest trade groups representing cannabis commerce, The New Jersey CannaBusiness Association (NJCBA) and the New Jersey Cannabis Trade Association (NJCTA), a coalition of the largest operators in the state.

“It continues the process of normalizing the cannabis industry through common sense measures that benefit everyone,” said NJCBA interim-president Scott Rudder, who also owns a dispensary license.

The NJCTA also released a statement supporting the normalization of the industry.

“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,” the statement partially read.

The NJCTA president, Todd Johnson, criticized the lack of state and federal deductions in a February NJCTA blog post, and said a company could end up “owing more in federal and state income taxes than their entire net income for the year.”

Gaining access to capital has been one of the primary challenges of the cannabis industry.

“Above all, this decision opens the door for entrepreneurs, social equity groups and cannabis operators of all sizes to gain access to critical capital and leverage opportunities that will allow their businesses to grow and thrive,” said James Leventis, executive vice president of Legal, Compliance & Government Affairs at Verano, a cannabis company that does business in New Jersey and elsewhere across the U.S.

The move has been touted as something that can help smaller operators even more.

“The large players are going to find a way to get what they need done in the investor market,” said cannabis lobbyist and lawyer Bill Caruso of Archer Law. “They have the ability to tap access to capital.”

“This is a great way for Jersey to do what it can in a very limited way, because of lack of action at the federal level to help — it will benefit small businesses,” he said.

Jelani Gibson is content lead for NJ Cannabis Insider. He may be reached at jgibson@njadvancemedia.com. Follow him on Twitter @jelanigibson1 and on LinkedIn.

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