Date: July 21, 2023Attorney: Martin D. Hauptman

The New Jersey Division of Taxation has recently issued a technical bulletin discussing critical changes in the taxation of cannabis businesses, particularly how income computation and reporting are influenced by a new law.

Starting from the tax years beginning on or after January 1, 2023, New Jersey has made a decisive move by decoupling itself from IRC § 280E. This transition has potentially transformative implications for corporate business taxpayers involved in the cannabis industry.

Previously, businesses in the cannabis industry were not allowed to claim expenditures as federal income tax deductions due to the classification of cannabis as a controlled substance under federal law. However, under the new law, corporate business taxpayers can deduct an amount equal to those disallowed federal tax expenditures. This legal alteration symbolizes a shift towards more favorable taxation policies for cannabis businesses in New Jersey.

In addition, the law opens doors for businesses to claim deductions on expenses that would have otherwise qualified as qualified research expenditures under IRC § 174. This means that these taxpayers are now also eligible for the research and development credit for such expenses. This provision serves to promote innovation and research in the cannabis industry, a step forward for this growing sector.

Notably, this tax leniency is not only confined to corporations. Partnerships and individuals can also take advantage of the new legislation. They are now permitted to deduct expenses that were disallowed under IRC § 280E when calculating gross income tax expenses.

However, to benefit from this law, taxpayers are required to attach a computation showing the calculations of their expenses. This is an essential step to ensure transparency and accuracy in the application of these new deductions.

The move by New Jersey to sever its ties with IRC § 280E signifies a significant shift in the way cannabis businesses are taxed, demonstrating an increased recognition and acceptance of the industry. The new provisions in taxation offer cannabis businesses a much-needed breather, potentially leading to greater industry growth and development in the state.

This landmark decision is detailed in the New Jersey Division of Taxation Technical Bulletin No. TB-106, issued on July 6, 2023.