On May 8, 2023, New Jersey Governor Phil Murphy signed Bill A-3946/S-340 into law, which decouples the state from the onerous Section 280E federal law that disallows most business deductions (except for certain costs of goods sold) targeting the cannabis industry. The new law applies to tax years beginning on or after January 1, 2023.
The key section of the law reads as follows: “As amended, this bill decouples the corporation business tax from the federal income tax provision (Section 280E) that prohibits deductions and credits for cannabis businesses. The bill also decouples S corporation income under the gross income tax from the federal provision.” The New Jersey Legislative Tax Committee also added a late amendment to the bill that removes the $15 million revenue cap from deducting ordinary and necessary business expenses if incurred by a licensed cannabis business.
The enactment of this law was welcome news to New Jersey cannabis owners and supportive business investors in the sector. Ever since New Jersey’s business “frenemy” New York decoupled from the Section 280E provision in June 2022, there was tremendous political pressure and lobbying for New Jersey to follow suit, otherwise it would cause a tangible differentiator that could curb the growth of the cannabis industry in New Jersey.
With the upper end of New Jersey tax rates in the 9% to 11.5% range, depending on the level of taxable income and the type of business, decoupling from 280E will provide a significant tax break. New Jersey has now joined the “Say No to 280E” club with approximately 20 other U.S. states.
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Thomas V. Cardinale
Thomas Cardinale is an EisnerAmper Tax Partner with over 20 years of public accounting experience, managing business tax compliance engagements for companies with foreign and domestic operations.