During his campaign, New Jersey Gov. Phil Murphy (D) made his intentions to fast track the expansion of New Jersey's medical marijuana program clear. This is the first step towards legalization of recreational marijuana in the state. While legal on a state level in some jurisdictions, cannabis remains a Schedule I controlled substance at the Federal level. This disparity between governmental bodies will leave many business owners wondering: what goes on my tax return? Because of Internal Revenue Code Section 280E, no deductions for ordinary and necessary business expenses are allowed in calculating taxable income for businesses trafficking in controlled substances. The courts have clarified that only deductions for expenses considered to be "cost of goods sold" are allowed. So what does that mean? Typically, cost of goods sold (COGS) includes direct expenses related to the production of marijuana, such as seeds, soil, and fertilizer. It may also include the cost of electricity used to power plant-growing lights and the labor costs paid to workers harvesting crops. The problem is that Section 280E disallows deductions for indirect expenses like taxes and licenses, insurance, and legal fees. Because of this, business owners in the industry are being taxed at much higher rates than non-cannabis business owners. This can result in a considerably increased effective tax rate because the business owners pay taxes on their "gross income" instead of their "taxable income." The determination of permissible expenses should be made on a case-by-case basis in consultation with a tax advisor who is familiar with the unique issues of the cannabis industry. The most important takeaway from this article should be that taxation of the cannabis industry is very complicated and it’s extremely important that business owners consult a reputable tax advisor before filing any tax returns related to this matter. Please contact Stacey Udell at (856) 486-2299 or Tyler Tomalavage at (609) 883-9000 with questions.