In a recent Ciaccia CPA social media post, I shared that the firm began serving small businesses in the cannabis industry. While all startups face hurdles to becoming thriving businesses, these operations, in particular, face a number of challenges because of the strict requirements and tax guidelines they must follow. Before I delve into those details, let me first explain my why for supporting their efforts.
It’s no secret that we live in tumultuous times. Like me, you probably take on and try to be thankful for each day that we’re given. That’s a broad statement, yet it points to our very basic need to have quality of life. I have seen many friends and family members benefit from the medicinal purposes of cannabis, whether it be for the treatment of pain, anxiety, or any number of conditions for which it is prescribed. That’s why I have no qualms with assisting businesses in this area, despite the existing stigma some still attach to this not-exactly new but slow-to-grow industry.
The Bumpy Road to Legalization
In 2010, New Jersey became the 14th state in the country to legalize medicinal-use marijuana for qualifying patients. That’s when the Compassionate Use Medical Marijuana Act (CUMMA) was passed by the NJ State legislature, but its forward movement stalled. Over the next two years, medicinal cannabis faced many restrictions and requirements until the first patient registry opened in August 2012. The first Alternative Treatment Center, providing cannabis to patients, opened in December 2012, two years after legalization.
In a 2020 referendum, NJ voters approved the legalization of cannabis. The New Jersey Cannabis Regulatory Enforcement Assistance, and Marketplace Modernization (CREAMM) Act legalized and regulated cannabis use for residents 21 years of age and over, who purchase at a licensed store. The Act also decriminalizes marijuana and hashish possession in small amounts. The legislation that followed took some time and pushed the first day of legal sales out to April 21, 2022.
A report released in 2020 by the American Civil Liberties Union revealed that, in 2018, black people were arrested for marijuana at a rate 3.45 times higher than whites in New Jersey despite similar usage. The legalization effort came about in part to reduce racial disparities in the criminal justice system and build an economic opportunity for the areas most affected. In his speech during the signing of the adult-use cannabis reform bill, Governor Phil Murphy also pointed out that legalization would help in, “establishing minimum standards for safe products and allowing law enforcement to focus their resources on real public safety matters.”
The Business of Cannabis in NJ
In December of 2022, the New Jersey Economic Development Authority (NJEDA) announced the creation of the Cannabis Equity Grant Program to give aspiring business owners a boost toward start-up expenses. The hope, according to NJEDA’s Chief Executive Officer Tim Sullivan, is to “maximize opportunities for underserved communities and people impacted by the War on Drugs.” In the initial pilot program, $10 million will be made available and 60% of that will go toward qualifying social equity applicants.
Legal but Still Challenging – 280E
To explain why this IRA amendment wreaks havoc on cannabis businesses, you’ll need to learn the back story.
280E was created back in the 1980’s after a convicted drug trafficker asserted his right under federal tax law to deduct regular business expenses. To prevent other drug dealers from doing the same thing, Congress created 280E, which states that no deductions should be allowed on any amount for any trade or business that traffics controlled substances.
Although 21 states, Washington, DC and Guam have legalized the recreational sale of adult-use cannabis, it’s still illegal on the federal level. The federal government continues to consider it to be a Schedule 1 substance, and New Jersey still applies 280E to state-regulated cannabis businesses.
Federal income taxes are determined by taking gross income and subtracting business expenses to calculate taxable income. Business owners pay taxes against their taxable income. Cannabis businesses pay taxes on gross income and are only able to deduct the cost of goods sold, which can seriously impact profit margins. These businesses pay tax rates that are 70% higher than businesses outside of the cannabis industry. Below is only a partial list of the business expenses that are scrutinized under 280E:
- Employee salaries
- telephone service
- health insurance premiums
- payments to contractors
The New Jersey Society of Certified Public Accountants (NJCPA), a cannabis Interest group, has written legislation that would decouple cannabis businesses from 280E. It has passed the full Assembly and Senate Budget Committee, but still needs to pass the full Senate and be signed by the Governor. Unit this happens, cannabis businesses must continue to carefully follow 280E’s state guidelines and tax requirements.
Cannabiz Services with Ciaccia CPA
Though the cannabis industry has faced many obstacles, it continues to see growth and new businesses come online weekly. We at Ciaccia CPA seek to be a trusted advisors to all business owners seeking guidance with stringent guidelines and tax requirements. For those searching for cannabis CPA services, we tier our services to meet you at your point of need. We offer three different levels of assistance so that our knowledge and expertise is not out of your financial reach. We do everything from focusing on compliance and reconciling bank accounts to monthly projections and profitability measurements.
As is true for all of the businesses we work with, your growth is our growth. We’re here to support and nurture your success!