Cannabusiness Advisory

State Solutions to the “280E Problem”

March 7, 2023




Does anyone else feel immense frustration when considering the inequitable treatment that cannabis businesses receive under Section 280E of the Internal Revenue Code (26 U.S.C. s. 280E)? It grinds my gears that our clients, that operate legally in their respective states of operation, aren’t afforded the same financial protections as businesses in other industries. Fortunately, some state lawmakers are taking legislative action to grant cannabis businesses equivalent tax deductions under state tax law. If you are unfamiliar with the 280E issue plaguing our national cannabis industry, I encourage you to take a few minutes and google it. You will find a library worth of materials on this hot topic. But to preserve optimism and sanity, this short article will focus on the solutions, not the problem.

In most cases, a state’s business tax laws mirror the analogous laws enacted at the federal level. However, New Jersey lawmakers have passed a bill permitting cannabis businesses to deduct certain expenses on their state tax returns that they are prohibited from deducting on their federal tax returns. This process is referred to as “decoupling” a state’s tax laws from the federal equivalent. Under the new law, New Jersey cannabis businesses subject to a corporation business tax would be entitled to deduct from their taxable income all ordinary and necessary business-related expenses incurred in connection with its operations, thus reducing their taxable income and, ultimately, the amount of taxes owed. These deductions would include rent payments; health insurance premiums and costs associated with employee benefit programs; utility expenses; banking-related fees; real estate taxes; mortgage interest; advertising and marketing expenses; and the list goes on. You do not need to be a CPA to appreciate the benefit cannabis businesses would realize once able to apply these business-related deductions during tax season.

While this bill, if passed, would result in a reduction in tax revenue collected from cannabis businesses, lawmakers view the change as both equitable and likely to attract and promote business within the state. Governor Phil Murphy is set to review and sign the bill into law in the near future.

Good news, part one, New Jersey is not alone in its efforts to alleviate cannabis businesses from burdensome tax treatment under 280E. Lawmakers in Iowa, Massachusetts, New York, Pennsylvania, and others have introduced or enacted into law similar bills entitling cannabis businesses to deduct business expenses from their taxable income in connection with their state tax returns.

Good news, part two, solutions to the adverse effect of 280E on cannabis businesses often garner bipartisan support. Congresswoman Nancy Mace, a Republican from South Carolina, has championed a proposed bill at the federal level to remove 280E’s penalties on cannabis businesses and has received substantial support from Democratic Congressmembers. However, similar to the hitherto failed attempt to vote on the commonsense solution proposed by the SAFE Act with respect to federally chartered banks working with cannabis businesses, the MACE Act (as it is known) has failed to gain sufficient traction to make it to the Congress floor. My hope is that a continued push at the state level to alleviate the adverse effects of 280E will result in greater momentum on this issue at the federal level.

In all states where cannabis is legalized for either medical or recreational purposes, I implore those state lawmakers to consider and adopt bills similar to the one sitting on Governor Murphy’s desk and provide fair and equitable tax relief to cannabis businesses that generate tax revenue and wellness for their communities. Join me in pestering your local rep on this issue.

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