New law permits NJ cannabusinesses to claim state tax deductions (updated)

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New Jersey’s nascent legalized cannabis industry is set to see some much-needed tax relief. 

Under a law signed May 8 by Gov. Phil Murphy, the state’s corporate business tax provisions will be decoupled from federal rules prohibiting deductions and credits for cannabis businesses, ultimately allowing licensed cannabis companies in New Jersey to deduct certain expenses on state tax returns.

According to Section 280E of the Internal Revenue Service (IRS) code, cannabis-related ventures are blocked from deducting typical business expenses on state and federal tax returns since marijuana is classified as a Schedule I narcotic by the federal government.

The measure, which was sponsored by Assemblymembers Annette Quijano, D-20th District; Clinton Calabrese, D-37th District; and Linda Carter, D-22nd District, was approved Feb. 27 by the Assembly in a 59-8 vote.

Companion legislation by state Sens. Troy Singleton, D-7th District, and Shirley Turner, D-15th District, also passed the same day in a 32-3 vote.

Following the May 8 bill signing, Singleton said, “We have seen here in New Jersey, and around the country, that legal cannabis businesses tend to lack diversity both in gender and race amongst its ownership ranks. This law aims to level the playing field for all cannabis businesses.”

“It will ensure that dispensaries are paying a fair amount of taxes by taking into account critical business expenditures and allowing these deductions from their income,” he went on to say.

Turner commented, “New Jersey’s cannabis industry is still in its infancy, and we need to act early to provide equal opportunity for all businesses to succeed. Supporting dispensaries while promoting diversity within the cannabis industry is better for our local economy and also helps to ensure that the profits from recreational cannabis are being funneled back into the communities that need it most.”

Quijano also issued a statement May 10, saying, “I applaud Governor Murphy for signing this legislation to ensure small businesses can thrive in our state’s adult-use cannabis industry. This new law will enable us to better support dispensaries in New Jersey by making sure they can take advantage of the tax deductions and credits that make running a business more affordable. I am confident this measure will fuel economic growth in the sector and help us make good on our commitment to prioritize equity in the cannabis industry.”

The new law takes effect immediately and applies to taxable years beginning on or after Jan. 1, 2023.

In a statement, the New Jersey Cannabis Trade Association thanked Murphy, Quijano and Singleton and said the reform “will provide a more economically viable landscape for our young industry and those wishing to enter it.”

The NJCTA, a statewide coalition of licensed medical and recreational dispensaries, also said, “The continued implementation of 280E placed several financial constraints on cannabis operators, big and small, by prohibiting them from deducting common business expenses from their taxes. Now, New Jersey’s licensed cannabis operators will be treated like any other legal enterprise operating in New Jersey, a sense of normalcy that our industry will cherish.”

New Jersey joins a growing number of states to decouple from IRS code Section 280E, including New York, California, Hawaii, Michigan, Colorado and Oregon.

Editor’s note: This story was updated at 4:38 p.m. ET May 10, 2023, to include a statement from Assemblymember Annette Quijano.