The State Assembly in New Jersey has approved a proposed bill that seeks to give cannabis businesses in the state leeway to deduct some of their expenses as they file their state tax returns. This is a partial solution to the heavy tax burden that these companies struggle with because of the 280E federal tax policy section, which bars entities dealing in prohibited substances from claiming any federal tax deductions.
The bill, introduced by Assemblymember Annette Quijano, received 60 to 6 vote, showing overwhelming support, and now heads to the state senate for further consideration and a vote before it is forwarded to the governor’s desk.
Generally, most tax policies of different states are a mirror-image of the federal IRS tax code. However, this bill aims at making an exception regarding the way state-legal cannabis enterprises determine their gross income. Under this proposal, the gross income of these businesses will be ascertained without factoring in the provisions of IRS section 280E.
While the businesses will get some relief from their state tax obligations, they will still have to comply with section 280E as they file their federal tax returns. The new law, if enacted, will take effect in the tax year starting on January 1, 2023, following its signing into law, according to a clause within this bill.
According to a fiscal analysis, which was published last month, the economic implications of this bill are likely to be mixed. On one hand, the state government, as well as other local authorities, is likely to forego the taxes that they have been collecting once the state tax code is decoupled from section 280E of the federal tax laws. It isn’t easy to quantify this tax loss because the recreational marijuana industry is still in its infancy (recreational sales commenced in April) in the state and its growth can be accelerated or impeded by any number of factors, so making accurate predictions about the possible tax losses is nearly impossible.
However, the analysis points out that the proposed tax relief could potentially spur more activity within the cannabis industry, thereby triggering the collection of additional tax revenues, which are hard to quantify because the industry is still in flux. Those gains could offset any tax losses resulting from the 280E exemption at state level.
Several states, including New York and Pennsylvania, are considering similar laws to reduce the tax burden suffered by licensed cannabis companies. It would be interesting to ascertain the tangible, quantifiable benefit that enterprises such as American Cannabis Partners might see if such measures were implemented in the jurisdictions where they operate.
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