Within the last few weeks, New Jersey has taken critical steps in the legalization of recreational cannabis use as state lawmakers have advanced a bill, called the “New Jersey Cannabis Regulatory and Expungement Aid Modernization Act,” which would legalize the possession and personal use of recreational marijuana. Generally, the bill would legalize the possession and personal use of one ounce or less of marijuana for people at least twenty one (21) years old and impose a significant tax upon the cannabis industry. While the bill recently cleared the Senate budget committee and the Assembly budget panel, the question some future New Jersey cannabis business owners now have is what implications does federal law have on the potential to see green.
Complications of Running a Cannabis Shop in New Jersey
Under the current drug scheduling system, the United States Drug Enforcement Administration (DEA) has classified cannabis as a Schedule 1 drug. Schedule 1 drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. This classification has serious impacts on those who may be looking to open a cannabis business in New Jersey as this classification impacts almost every aspect of traditional businesses ownership.
In states where cannabis has been legalized for recreational use, businesses often function as cash-only enterprises. In 2014, under the Obama administration, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) provided guidance to banks about how to address the growing marijuana industry. A memorandum issued by FinCEN provided that banking institutions were required to regularly file reports on its customers with cannabis accounts.
The content of the reports were to include the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified.
Roadblocks to Financing your Marijuana Shop in New Jersey
Financial institutions should use the term “MARIJUANA LIMITED” in the narrative section. While more banks have been willing to work with cannabis businesses due to the growth of legalization of recreational and medical use, a majority are still reluctant to do so which could present a roadblock to New Jersey business owners looking to enter the industry.
Moreover, there are serious federal tax implications of operating a cannabis business. Under § 162 of the Internal Revenue Code (I.R.C.) “ordinary and necessary” business expenses are tax deductible. However, under I.R.C. § 280E a business engaging in the trafficking of a Schedule I or II controlled substance, such as cannabis, is barred from taking such tax deductions or credits. As such, New Jersey business owners may end up paying much more in federal taxes.
Established Case Law Provides Hope
There has been case law where certain businesses were allowed to take deductions. One key case was Caregiving Californians Helping to Alleviate Med. Problems, Inc. v. C.I.R., 128 T.C. 173 (2007). In this case, the Tax Court held that the business expenses associated with caregiving services were tax deductible since these services consisted of a business that was separate from the medical cannabis business.
As the cannabis industry continues to grow with more states legalizing such, it is critical to stay apprised of any recent developments and to hire professionals, such as accountants and attorneys, who are aware of the various implications to opening a cannabis business.
New Jersey Tax Lawyers Provide Business Counsel
At Sandelands Eyet LLP, our trusted tax lawyers provide business counsel to entrepreneurs looking to open a New Jersey cannabis shop, as well as entrepreneurs who simply need guidance in forming and structuring their businesses. Our lawyers have decades of experience resolving New Jersey tax matters and have helped countless clients achieve their goals in business. Call (908) 470-1200 for a consultation.