New York State Tax Incentives That May Be Available to Cannabis Businesses:
Those in the cannabis industry know all too well that cannabis businesses currently face the highest effective tax rates of any organization. In New York, distributors will be subject to state excise tax on the THC content (in milligrams) of various product categories: 3 cents per mg for edibles, 0.8 cent per mg for concentrates; and 0.5 cent per mg for flower. The worst of the tax burden, however, is a result of Internal Revenue Code Section 280E, which prohibits taxpayers who are engaged in the businesses of “trafficking a controlled substance” from deducting most business expenses and claiming federal tax credits. Although cannabinoid hemp was de-scheduled a few years ago, adult and medical use cannabis remain a Schedule 1 controlled substance for federal purposes. This results in the unfortunate situation where a legitimate state legal cannabis business is treated the same from a tax perspective as a seller of entirely banned substances such as Heroin or Cocaine.
A win for the cannabis industry in New York, the recently signed 2023 state budget changes the state’s tax law to decouple from Section 280E. What does this mean? New York (along with many other states) uses federal taxable income as the starting point for calculating state taxable income. Adjustments are then made for items where the state tax law differs from the federal treatment. Since 280E will no longer be followed as of the tax year beginning January 1, 2023, NY cannabis businesses will be treated the same as any other taxpayer for purposes of state income tax. This means that not only can businesses deduct all the business expenses that were disallowed on their federal return due to 280E, but state tax credits and incentives are available too.
We’ve compiled this list of NY tax incentives that may be available to cannabis businesses, depending on what part of the supply chain they participate in:
Agriculture Related (for cultivators):
- Farm workforce retention credit: Tax credit of $600 per eligible farm employee.
- Agricultural buildings tax credit: Allows a ten-year property tax exemption for newly constructed agricultural structures.
- Farmers’ school tax credit: The credit amount depends on amount of qualified agricultural acres and school district taxes paid.
Manufacturers (for cultivators and processors):
- Qualified Manufacturer Status
- Zero percent tax rate: Corporations who meet the definition of a qualified manufacturer are eligible for a zero percent tax rate for the business income tax.
- Real property tax credit: This credit is 20% of eligible real property taxes paid by qualified manufacturer taxpayers, corporate and non-corporate.
- Investment Tax Credit (ITC): A portion of the cost of property used for production, including agriculture and processing equipment, is eligible for ITC.
- Employment Incentive Credit is available in addition to the ITC for businesses that increase their average number of employees in NY.
Other Incentives:
- Employment related credits such as the credit for employment of persons with disabilities.
- Excelsior jobs program which is administered by Empire State Development, and certification is required.
- Automated external defibrillator credit of up to $500 per unit.
While the list here is not exhaustive, it’s a great starting point for cannabis businesses looking to reduce their tax liability. Understanding the rules and requirements for each credit is key. Some incentives require certifications from various state agencies so pre-planning will be critical.
In addition, diligent financial record keeping will be required in order to claim tax incentives and to track expenses eligible to deduct due to non-conformity with 280E. It will be necessary to have a system in place that differentiates between Section 280E and non 280E cost of goods sold, and that can generate income statement versions for federal and state tax purposes. As a result of these complexities, setting up accounting processes to support tax compliance should be on the minds of all new adult-use license holders.
If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.