Update on the Cannabis Industry in New Jersey and the U.S.

By Andrew Hunzicker, CPA, Dope CFO Certified Advisors – July 9, 2024

The cannabis industry has come a long way over the last 10 years since Colorado legalized in 2013, going from $0 to a $32 billion market last year. Along the way, hemp and CBD went from illegal to 100% legal, and 24 states are 100% legal for medical and/or recreational uses. Only three states have no form of legalized marijuana. The industry also has many verticals including farming, chemical processing, product manufacturing, distribution and retail and is in need of CPAs who understand the complexities and have the deep knowledge to serve this industry. This market is expected to more than double over the next five years.

The New Jersey market came close to $1 billion in sales in 2023 with more than 50 new dispensaries opened. New Jersey is similar in size to Michigan in population, and Michigan did $3 billion in sales in 2023, so New Jersey has a lot of growth potential and more CPAs are needed to serve this growing industry.

Where We Are Today

With seven out of 10 Americans supporting legalization of cannabis (according to a 2023 Gallup Poll), it’s one of the few issues in our nation that the majority of Democrats and Republicans actually agree on.

In 2022, President Biden asked U.S. Health and Human Services Secretary Xavier Becerra to begin the administrative process of reviewing how marijuana is scheduled under federal law. Currently, cannabis is on Schedule 1, which is defined as drugs that have no known medical use and potential for abuse, including heroin and LSD. Today, cannabis is being researched world-wide and used for myriad medical ailments pain mitigation, cancer, arthritis, PTSD, epilepsy, autism and many more so it clearly does not belong on Schedule 1. Based on these facts and over a year of detailed research, the Secretary recommended to the Drug Enforcement Administration (DEA) that cannabis be moved to Schedule 3, which includes drugs with moderate to low potential for abuse (for example, Tylenol with codeine is on this list). Right now, the DEA is reviewing this recommendation, which was also endorsed by the Federal Drug Administration, and a final decision is expected this year.

Looking Ahead

If cannabis moves to Schedule 3, there are immediate tax and cash flow benefits to every cannabis company in the U.S. Currently, Internal Revenue Code Section 280E applies to all companies:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

This tax code regulation means that all cannabis companies effectively pay more in federal tax, which lowers their cash flow, lowers their valuation and makes them less attractive to capital sources. If the DEA accepts the recommendation to move cannabis to Schedule 3, cannabis company valuations will go up overnight.

There will be many effects of re-scheduling:

Lower-risk drug classification can open up more banking and commercial lending options.
New equity capital will likely flow to the space and cannabis companies will become more profitable.
Struggling cannabis companies will have access to bankruptcy protection, which will allow for restructures and save jobs.
Interstate commerce can open, and a national price regime will emerge as opposed to each state having their own price market for cannabis.
R&D rules and funding can change, including a massive increase in medical research and big pharma entering the space.
Cannabis will remain a federally regulated controlled substance, and therefore, will still be regulated under the Food and Drug Administration (FDA), U.S. Department of Agriculture (USDA) and state law.
There will be the potential for new federal taxes on the industry, as well as more local taxes.

This is a great time to get involved and serve an amazing niche that is rewarding both financially and at the personal level if you believe in the medical, social and criminal justice reform that also comes with this new industry.