AB FinWright’s Rachel Wright, Abraham Finberg, and Simon Menkes share how legal cannabis businesses in New York can use the qualified New York manufacturer credit to ease their tax burdens.
Reprinted with the permission of Bloomberg Tax
New York cannabis cultivators and manufacturers face more challenges than most businesses in the Empire State. At the federal level, the IRS imposes an onerous tax burden on cannabis businesses due to Section 280E of the tax code.
The illegal cannabis market also is booming, and legitimate cannabis companies are forced to compete against clandestine operations that don’t pay tax. In this difficult environment, licensed cannabis businesses must find ways to shave their tax obligations to the bone.
Electing to be treated as a qualified New York manufacturer for tax purposes in New York State and New York City is one solution. Qualified New York manufacturers benefit from a 20% real property tax credit, a 0% rate on their business income base, a reduced tax rate and cap on their capital tax base, and lower fixed dollar minimum tax amounts.
Qualified New York Manufacturer Inclusions
On the federal level, as well as in many states, it’s unclear whether cannabis businesses qualify for any special tax preferences because of Section 280E, which denies any deductions or credits for cannabis businesses other than the cost of goods sold and which is still followed by a lot of states that have made cannabis legal.
Even though New York has specifically exempted cannabis businesses from following 280E, the New York State Department of Taxation and Finance recently confirmed their eligibility to us in writing: “A manufacturer or cultivator of cannabis would qualify as a Qualified New York Manufacturer if the conditions under NYS Tax Law section 210(1)(a)(vi) are met.”
New York State defines a manufacturer in Tax Law section 210(1)(a)(vi) as “a taxpayer or a combined group that is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing during the tax year.”
By “principally engaged,” the state means that “more than 50% of the gross receipts of the taxpayer or the combined group during the tax year are derived from the sale of goods” from these activities. This definition should allow many vertically integrated cannabis businesses with significant retail revenue from the sale of third-party products to participate as well.
Two Options to Be a Qualified Manufacturer
A New York manufacturer must meet one of two requirements annually to qualify. It either must have “property in New York State of the type described for the investment tax credit under Tax Law section 210.12(b)(i)(A) with an adjusted basis for federal income tax purposes of at least one million dollars at the end of the tax year” or have “all its real and personal property in New York State.”
Property for the investment tax credit as discussed in Tax Law section 210.12(b)(i)(A) essentially includes buildings, equipment, and facilities that are depreciable over at least four years; which are principally used for production; are acquired by purchase; and have a situs within the state.
Real Property Tax Credit
A sizeable 20% state tax credit is available to qualified New York manufacturers and is equal to 20% times the eligible real property taxes paid during the year. To qualify for the credit, the real property taxes must be paid in the year they are owed, must be for real property located in New York State, and must be principally used in the manufacturing activities described above. Taxes for areas not involved in the production of goods, such as parking lots, common areas, and vacant land must be excluded.
It’s important to note that real property taxes include those paid by the taxpayer where the taxpayer leases such real property from an unrelated third party, as long as the taxes are listed as one of the payment obligations in a written lease, and as long as those taxes have been paid by the taxpayer directly to the taxing authority and has received a written receipt from that authority.
This tax credit is obtained through filing Form CT-641 for corporations and IT-641 for all other businesses. The state notes that the credit is nonrefundable and cannot reduce the tax due to an amount less than $25, although for estates and trusts, it can reduce the tax due to $0.
Additional Tax Benefits
Qualified manufacturers reap significant state franchise tax advantages. Business income tax drops to $0 for qualified manufacturers (normally 6.5% to 7.25%). Additionally, business capital tax drops to $0 for qualified manufacturers (normally 0.1875% of capital), and fixed dollar minimum tax, normally $25 to $200,000, ranges from $19 to $3,750.
New York City offers qualified manufacturers tax advantages as well. While the normal city income tax rate is 6.5% to 8.85%, a company’s status as a qualified manufacturer can drop that rate to as low as 4.425%. If the corporation isn’t based in New York City, it still owes business tax if the total income from New York City sources is at least $1 million.
Until New York and other states find a way to rein in illegal cannabis, and until the federal government chooses to lift the heavy burden of 280E, licensed cannabis businesses must seize every opportunity to minimize their taxes. The reductions in income tax, capital tax, minimum tax, and real property tax from electing qualified New York manufacturer status will go a long way in helping legal cannabis remain competitive.