On May 8, 2023, New Jersey Governor Phil Murphy officially signed legislation that effectively decouples state tax provisions from the federal prohibition on cannabis business deductions beginning with the 2023 tax year. The bills, A-3946/S-340, originally passed the NJ Senate and House in February 2023 and have been awaiting the Governor’s final approval and signature.
Summary Provided by Ren Cicalese III, CPA, MST
Since cannabis remains illegal at the federal level, IRS Section 280E prohibits businesses that sell cannabis and other federally illegal controlled substances from deducting expenses other than cost of goods sold. Having such limitations and not being able to take full deductions results in a much higher taxable income. This emphasizes why proper tax planning and compliance with a knowledgeable CPA is so critical.
Under this new state law, licensed New Jersey-based cannabis businesses will now be allowed to take both their cost of goods sold and operating expenses as full deductions on their state income tax returns. As many business owners know, deducting business expenses is a critical aspect of tax planning and can affect profitability.
Written by the New Jersey Society of CPAs (NJCPA) Cannabis Interest Group in an effort to resolve the unfair tax treatment in a state where cannabis is legal, this workaround has been welcomed and applauded by the New Jersey cannabis community. Allowing the opportunity to deduct the ordinary expenses associated with running and operating a business or dispensary, even at just the state level, will financially benefit businesses in this growing industry.
Section 280E still applies at the federal level, meaning for federal tax purposes, cannabis business owners will still be limited to only taking the cost of goods sold as a valid deduction on the federal income tax return. As of this tax year and going forward, that will no longer apply for New Jersey state income tax returns.
The above chart is a generalized example.
Please speak with your accountant and advisor for how it pertains to your specific situation.
With the constant changes in the cannabis industry, it’s imperative to have a trusted adviser by your side throughout all stages of the business cycle. From applications to licensing to open and operating, our Cannabis advisors at Alloy Silverstein are here to help you be compliant and grow your business or dispensary. For more information on how this law change applies to you and your marijuana business, reach out to an Alloy Silverstein Advisor today.
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Associate Partner
Ren III provides tax, accounting, and advisory services to a broad range of clients, with a specialty for manufacturers, title insurance companies, and professional service providers.
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