NJCPA’s Proposed Tax Provision Helps Small Businesses

by Melissa Dardani, CPA, leader of the NJCPA Cannabis Interest Group | November 30, 2020

On Nov. 5, 2020, the NJCPA released a statement proposing the State of New Jersey decouple from Internal Revenue Code Section 280E for certain small businesses. Section 280E disallows legal cannabis businesses from taking ordinary and necessary business deductions as an offset to taxable income and is a costly compliance burden for regulated cannabis companies. The National Cannabis Industry Association estimates that cannabis businesses are typically subject to effective tax rates of 70 percent or higher after considering 280E disallowed deductions.

The NJCPA’s original proposal, which was issued in 2019, called for complete decoupling from 280E. This was a non-starter for legislators due to the state’s budgetary concerns. The current proposal calls for the enactment of a revenue threshold to determine eligibility for decoupling on a business-by-business basis. The suggested revenue threshold is $25 million. This stems from IRC §448, which was thrust into relevance upon ratification of the Tax Cuts and Jobs Act (TCJA) in 2017. The lower threshold also gives a leg up to small businesses looking to enter New Jersey’s cannabis marketplace which could otherwise become dominated by large, already-established companies.

Further, the Society has recommended that the state rely on the complete provisions of §448 for the purpose of making the “small business” determination. Of most notable value, §448 calls for related entities to aggregate their gross receipts for the purpose of the revenue threshold and precludes businesses that meet the definition of a tax shelter from obtaining the relevant tax benefit.

Keep up to date on the progress of the Society’s proposal and other cannabis-related news at njcpa.org/cannabis. And NJCPA members are invited to join the Cannabis Interest Group at njcpa.org/groups.

UPDATE: Legislation (S3240) based on the NJCPA proposal, and sponsored by Senator Troy Singleton, was introduced on Dec. 10. 

Melissa A. Dardani

Melissa A. Dardani

Melissa A. Dardani, CPA, CFE, MAcc, is the founder of MD Advisory Services. She is a member of the NJCPA Emerging Technologies Interest Group and several other interest groups. She can be reached at melissa.dardani@mdas.cpa.

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