After New Jersey voters approved a ballot measure to legalize recreational marijuana this week, the New Jersey Society of CPAs is calling on state lawmakers and regulators to pass legislation and rules to allow cannabis merchants to deduct business expenses.
Voters in the Garden State approved a constitutional amendment to legalize recreational use of cannabis. However, the NJCPA said lawmakers still have to pass legislation to enable recreational cannabis sales and then the state’s Cannabis Regulatory Commission needs to draft a regulatory framework. They think that should include the ability to deduct business expenses, or else the society warns that large, established players, many coming from out of state, will dominate the new market.
Cannabis businesses currently don’t have access to the business expensing tax break even though it’s available to all other New Jersey businesses, the NJCPA pointed out. This is because New Jersey “piggybacks” onto Section 280E of the Tax Code, which prohibits any company that’s illegally engaged in drug trafficking from deducting business expenses. While cannabis remains illegal on a federal level, the NJCPA acknowledged this makes sense for federal taxes, but not in New Jersey where it’s now legal.
In a survey of NJCPA members, 66 percent of respondents indicated that having a commercial cannabis industry in New Jersey would help the Garden State’s economy. The NJCPA is calling on state lawmakers to decouple New Jersey from Section 280E. “While we would prefer decoupling for all cannabis businesses, it is most important for small businesses, many of which are minority- and women-owned,” the group announced Thursday. “Larger operators generally have enough cash on hand to withstand the drain on profits that Sec. 280E will cause in initial years, but smaller businesses often do not. It could literally stifle the ability of small cannabis businesses to get off the ground.”
Many states that have legalized cannabis so far have already decoupled from Section 280E, the NJPCA noted. Of the 10 states with a legal market for recreational marijuana, two have decoupled completely, one has specifically decoupled for corporations, and two have no state tax at the business level, thus enabling them to decouple by default. Two states with widespread legal cannabis industries, Colorado and Oregon, have specifically decoupled.
