The New Jersey Assembly passed legislation that would enable state-licensed cannabusinesses to deduct certain operational expenses from their state tax returns. The move is intended to counter restrictions placed on marijuana businesses from making such deductions under an article in the federal tax code.
Internal Revenue Service (IRS) Code 280E prevents businesses dealing in a federally-illegal substance from deducting operating expenses from their tax returns, and this policy is typically mirrored in state tax policies.
Under Assemblymember Annette Quijano’s (D) bill, however, a New Jersey cannabis company’s gross income would “be determined without regard to section 280E of the [federal] Internal Revenue Code.”
After advancing through committees with amendments, the Assembly approved the legislation in a 60-6 vote.
New Jersey cannabusinesses would still be subject to federal tax limitations imposed by IRS Code 280E, but they would at least be able to deduct expenses such as rent and payroll from their state tax returns.
Should the proposed legislation be enacted into New Jersey law, it would “apply to taxable years beginning on or after January 1 following enactment.”
Ahead of the Assembly vote, a fiscal analysis of the bill by the Office of Legislative Services (OLS) revealed it would likely result in mixed economic outcomes.
On the one hand, the move away from 280E would “result in an indeterminate annual loss of revenue” for state coffers since cannabusiness would seek greater tax relief. On the other hand, allowing more tax deductions may “generate more economic activity by cannabis businesses” that would indirectly benefit state and local governments.
“OLS notes that the legal adult-use cannabis industry in New Jersey is immature at the time of this writing, having only begun sales at limited locations in April of this year,” the analysis reads. “The industry may significantly grow or change in unpredictable ways over the coming years, casting uncertainty over any fiscal estimate.”
The original text of the bill proposed limiting the ability to make certain operational expense deductions to cannabusiness with less than $15 million in gross receipts. This provision was removed in the Assembly Oversight, Reform and Federal Relations Committee.
The legislation is now on its way to the Senate for further deliberation.
New Jersey isn’t alone in seeking to provide state-level tax relief for marijuana businesses. The governor of New York signed off on a budget proposal earlier this year that would also allow cannabusinesses to make certain operational deductions, while a House Committee in Pennsylvania approved legislation that would do much the same for medical marijuana businesses.
At the federal level, several bills have been introduced to remove the application of 280E to state-licensed marijuana businesses but they have yet to have a full floor hearing or vote.
For its part, the IRS issued advice to marijuana businesses last year on how to remain compliant with federal tax laws but reiterated that such businesses cannot make standard deductions.