Legislation Introduced to Conditionally Decouple New Jersey from IRC Section 280E
Legislation proposed by the NJCPA was introduced on Dec. 10, 2020, by Senator Troy Singleton. S3240 seeks to decouple New Jersey from Internal Revenue Code Section 280E for certain businesses in order to level the paying field for small and midsize businesses looking to enter New Jersey's new adult-use cannabis industry.
Summary of S3240
This bill decouples the corporation business tax from the federal income tax provision that prohibits deductions and credits for cannabis businesses. The bill also decouples S corporation income under the gross income tax from the federal provision. In both instances, the bill only decouples from the federal provision for taxpayers with less than $15 million of gross receipts.
Under the State’s corporation business tax, and for S corporation income under the gross income tax, the starting point for calculating income that is taxable is that which is taxable under the federal income tax. Federal law (26 U.S.C. s.280E) prohibits deductions and credits for businesses trafficking in federally defined schedule I and II controlled substances, which includes cannabis. Deductions for business expenses are therefore not available to cannabis businesses, which results in a higher federal income tax liability than other businesses with similar amounts of income. Because the corporation business tax is currently linked by State law to federal law in this respect, cannabis businesses subject to the corporation business tax would also have a higher tax liability than other businesses with similar amounts of income. The same is true for S corporation income under the gross income tax. In contrast, other forms of business income under the gross income tax are not linked to the federal provision by State law, but this bill nevertheless includes a provision to state explicitly that the federal provision does not apply.
As a result of enactment of this bill, a business with less than $15 million of gross receipts and subject to the corporation business tax will be allowed to deduct from income all ordinary and necessary business expenses incurred in carrying on a licensed cannabis business. The deduction will also be allowed when calculating S corporation income from S corporations with less than $15 million of gross receipts, and will continue to be allowed for other forms of business income under the gross income tax regardless of total gross receipts.