CPA, National Cannabis & Hemp Practice leader
Companies need to understand the impact of IRC Section 280E, which causes tremendous difficulty for cannabis companies, as it increases their effective tax rate well above what non-cannabis companies pay in taxes. 280E limits otherwise ordinary expenses from being deducted to arrive at taxable income for companies that are involved with Schedule 1 and Schedule 2 substances. In order to be successful, cannabis companies need cash and, in an industry where bank borrowing is difficult to come by, maintaining and limiting the tax impact of operations could be the life preserver that many of the cannabis companies are searching for.
Three more crucial questions about cannabis in N.J. … and answers from our experts:
- How do you serve those in the cannabis industry?
- How should those who want to be involved in the industry proceed in the next 12 months as the rules and regulations — and the licensing — are worked out?
- What’s something else we should know about doing business in the cannabis space in New Jersey?
Guillermo C. Artiles
Chair, Government Affairs & Cannabis practice groups
McCarter & English:
The most overlooked area in all cannabis development, medical and soon-to-be adult use, is the influence hyperlocal forces can play in New Jersey. It’s unique to New Jersey, and will surprise many applicants, especially those who have succeeded elsewhere in the industry but never operated a business in New Jersey.
John D. Fanburg, Esq.
Managing member and co-chair, Cannabis Industry Practice
Brach Eichler LLP:
The new industry will be highly competitive, so investment at any level must be considered a long-term investment. It will take time for the return to be realized.
Charles Messina, Esq.
Partner, co-chair, Cannabis Law Group
I call it the “Garden State home rule.” Similar to the previous application rounds, you are not getting a license unless you have a “significantly involved person” on your team that has resided in New Jersey for at least two years. To obtain a microbusiness license, there are even further restrictions. At least 51% of the owners, directors, officers or employees of your microbusiness, for example, must be residents of the town you’re applying in, or in a municipality bordering such town. Regardless of license type, you ultimately need to get that municipality to approve your desired location.
John V. Pellitteri
CPA, partner, Cannabis Practice leader
Grassi Advisors & Accountants:
There are very limited capital and banking options in the space, due to the classification of cannabis as a federally illegal substance. Many financial institutions and other lenders will not participate in the industry, and those that do charge hefty fees for what they consider high-risk lending. Other capital sources, such as investors or private equity firms, will require a clear, well-thought-out business plan. The ability to raise capital is a major factor in whether or not your license application will be approved, so this issue must be considered before you make the decision to move forward.
Robert E. Schiappacasse
Co-chair, Cannabis Industry Practice Group
Sills Cummis & Gross P.C.:
One hurdle to possible success in the cannabis industry here in New Jersey is experience. As a nascent industry in New Jersey, operators are going to need to have access to intellectual capital and resources to solve problems and address issues that are likely to occur, and yet may be unique to the industry here in New Jersey. Unlike other, more well-developed industries in which first-time operators would have years, if not decades, of industry information to rely upon, New Jersey operators may need to go outside New Jersey for that information.
Co-chair, Cannabis Law Practice
Chiesa Shahinian & Giantomasi P.C.:
Between application fees, property costs and limited funding sources, the licensure process can be capital-intensive for small to midmarket operators. My hope is that the microlicense structure contemplated in the new legislation will help level the playing field and usher in a generation of “craft” cannabis entrepreneurs.
It is also worth noting that, despite several stalled attempts to provide federal protections to financial institutions serving cannabis businesses, the approved, ballot-driven cannabis referendums across the U.S. in the 2020 election — as well as the new presidential administration — are positive indicators that, perhaps soon, operators in the space will have improved access to capital.