How Savvy New York Cannabis Businesses Are Shaving Down Their Taxes
Legal cannabis businesses in the State of New York face many challenges. It’s a difficult task just to obtain a license, and then many companies must find ways to compete with the thousands of illegal cannabis businesses that operate in the state today. With cannabis taxes as high as they are, savvy cannabis companies are using every method possible to lower their taxes. One such tax opportunity for companies that cultivate or manufacture cannabis products is to elect to be treated as a “Qualified New York Manufacturer”.
Qualified New York manufacturers benefit from a zero percent rate on their business income base, a reduced tax rate and cap on their capital tax base, lower fixed dollar minimum tax amounts, and a real property tax credit. This can result in significant tax savings.
What is a Qualified Manufacturer?
As we reported in our 2022 article on Bloomberg.com, a qualified manufacturer is one that is principally engaged in the production of goods by manufacturing, processing, assembling … extracting, farming, agriculture, etc. The business must also have a property in New York State of the type described for the investment tax credit under Tax Law § 210-B.1(b)(i)(A) (1)that has an adjusted basis for New York State tax purposes of at least $1 million at the end of the tax year or have all of its real and personal property in New York State(2).
The state further defines “principally engaged in manufacturing” as having more than 50% of gross receipts derived from the sale of goods from the above-listed activities(3). This definition would allow many vertically integrated cannabis businesses with significant retail revenue from the sale of third-party products to participate as well.
New York State Corporate Franchise Tax Benefits
Qualified manufacturers reap significant state franchise tax advantages:
- Business Income Tax: drops to $0 for qualified manufacturers (normally 6.5%-7.25%).
- Business Capital Tax: drops to $0 for qualified manufacturers (normally 0.1875% of capital).
- Fixed Dollar Minimum Tax: ranges from $19 to $3,740 (normally $25 to $200,000).
New York City Business Corporation Tax Benefits
New York City also offers qualified manufacturers tax advantages. While the normal city income tax rate is 6.5%-8.85%, a company’s status as a qualified manufacturer can drop that rate down to as low as 4.425%. The City’s corporation tax only kicks in, though, when total income from New York City sources is $1 million or more(4).
Real Property Tax Credit
Another valuable benefit for qualified manufacturers is 20% tax credit on taxes paid on real property(5).
Running a financially successful cannabis business in New York is not an easy task. Difficult licensing requirements, social equity obligations, competition from illegal operations, and heavy federal, state, and local taxation all work against this goal. Designating a cannabis business as a Qualified New York Manufacturer brings with it strong tax advantages, making the goal of being profitable a significant step closer.
- Tangible personal property and other tangible property, including buildings and structural components of buildings, which: are depreciable pursuant to Internal Revenue Code (IRC) § 167; have a useful life of four years or more; are acquired by purchase as defined in IRC § 179(d); have a situs in the state; and are principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing.
- New York State Adjusted Basis for Qualified New York Manufacturers