Tax Incentives for Cannabis Companies
Without Section 280E, hemp businesses can begin to take advantage of various federal tax credits and accelerated tax deductions.
Federal Credits, Solar Investment Tax Credit
Various federal tax credits such as the research and development credit, the work opportunity credit, and the solar investment tax credits exist and may be of interest to hemp businesses. For example, one such credit is the 30% federal solar investment tax credit. Besides the 30% tax credit, solar investment can result in reduced energy costs, which could mean additional savings for businesses.
Federal Tax-incentivized Deductions
Businesses not subject to Section 280E can deduct their ordinary and necessary business expenses instead of just cost of goods sold. Some deductions for tax purposes can even be accelerated, such as the 100% depreciation deduction.
Significant California tax code benefits have been available to cannabis companies. Such benefits have included a partial sales and use tax exemption, a partial diesel fuel credit, and a manufacturing and R&D equipment exemption.
California Partial Sales and Use Tax Exemption
Since 2014, a partial sales and use tax exemption has applied to purchasers that meet certain requirements. It provides an exemption of 5% with respect to acquisitions by such purchasers of qualified farm equipment and machinery that is used at least 50% of the time in producing and harvesting agricultural products. Qualifying equipment may include tools, grow tents, lights, drying racks, solar and hydroponic equipment.
California Partial Diesel Fuel Credit
A partial diesel fuel credit applies to purchases of certain types of diesel fuel.
California Manufacturing and Research & Development Equipment Exemption
A manufacturing and R&D equipment exemption applies to qualifying businesses in the North American Industry Classification System (NAICS) categories 311100 – 339999, 541711, and 541712 that acquire qualifying property. This exemption provides a reduced 3.3125% sales and use tax rate on such purchases. There are no NAICS codes per se for cannabis activities; however, it would seem reasonable that a hemp-based business involved in manufacturing should be classified by a NAICS code in the manufacturing category.
No application is required to qualify for the reduced tax rate; however, the purchaser must provide the seller with a completed and signed partial exemption certificate to receive the rate. The exemption certificates can be found on the State of California website. The certificate asks for the purchaser’s information and includes a statement that the property purchased is used for a qualifying activity and that the purchaser is a qualified person.
The cannabis industry is at a crossroads in terms of its taxation. As federal and state tax law continue to align the treatment of cannabis businesses with non-cannabis businesses, it could be increasingly important for cannabis businesses to understand the tax incentives that may be available to them.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Cannabis and Taxes: Maximizing Your Company's Value
InsightHow industry best practices can help cannabis companies strengthen costing and systems to improve profit marginsIra Weinstein, Brandon Barksdale, Chris D’ArduiniLearn how optimized cost analysis – with the right cost accounting method, accurate data, and connected systems – can help cannabis operators boost their value.
Press ReleaseGroup of phenomenal leaders call for the shattering of cannabis grass ceiling with the release of five whitepapersThe Arcview Group and National Cannabis Industry Association Jointly Release Women-authored Research in Celebration of the First Woman Vice President.
Insight10 top tax issues in cannabis operating agreementsMichael HarlowBe aware of the impacts and implications of having a partnership vs. corporation structure, debt agreements, tax withholding, tax distributions, and more.
InsightCannabis outlook for 2021 and beyond: Predicting the commercial landscape and business challengesGreg Chin, Michael HarlowRead what industry specialists from New Frontier Data, CohnReznick, and NFP expect for the investment climate, M&A, business tax and talent challenges, and more.
InsightQ&A: Extra insights on how cannabis companies can use ERP systems to scale for successChris D’Arduini, Alex VolpiRead insights on how to choose an ERP platform, considerations for traditional vs. cannabis-specific ERP platforms (or a hybrid approach), and more.
InsightPerspective: New IRS ‘Marijuana Industry’ page offers useful resources, but few new insightsMichael HarlowWhile it is good to see the IRS acknowledging the marijuana industry and aggregating useful links, the page overall offers little new information. Read more.