Two new tax credits were enacted in California, which begin in tax year 2023 and extend through 2027. Cannabis businesses generally cannot deduct business expenses for federal income tax purposes, so to alleviate the tax burden and offset operating costs, California is providing a measure of tax relief for the industry. These two new credits are the High-Road Cannabis Tax Credit and Cannabis Equity Tax Credit. Qualifying cannabis businesses may claim the credits against their corporate franchise and income taxes or personal income tax. Unused credit may be carried over for eight taxable years.
High-Road Cannabis Tax Credit (HRCTC)
The HRCTC is available for taxable years from January 1, 2023 through December 31, 2027. The credit is equal to 25% of qualified expenditures, up to $250,000 per year. The total funding for all taxpayers is $20 million for all tax years.
Qualifying businesses include licensed cannabis retailers and microbusinesses. These businesses must provide employment compensation, employer-provided group health insurance and retirement or pension benefits. Qualified expenditures include wages and benefits for full-time employees paid between 150% ($23.25) and 350% ($54.25) of the state minimum wage, costs for safety-related equipment and training, and workforce development services for employees.
In order to qualify for the HRCTC, businesses must file a Tentative Credit Reservation for the 2023 taxable year between July 1, 2023 and December 31, 2023.
Cannabis Equity Tax Credit (CETC)
California also offers the CETC for taxable years from January 1, 2023 through December 31, 2027. The $10,000 credit is available to cannabis business owners that received approval for a license fee waiver under the state’s Cannabis Equity Program. The Program provides support to business owners harmed by cannabis criminalization.
California Research & Development (R&D) Tax Credit
As cannabis leaders explore these two credits for their cannabis company, they’d be wise to consider evaluating whether its activities are eligible for the California R&D tax credit as well. The credit is a permanent item for all open taxable years (generally the current and prior three years) and is a dollar-for-dollar reduction of state income tax liability.
Cannabis business owners that qualify for this tax credit must be engaged in R&D activities within the state of California, which can include (but are not limited) to the following:
- Developing new products (e.g. new cannabis formulations)
- Unique use of lighting structures for growing
- Developing oil or extraction techniques
- Experimenting with soil, fertilizer, or other environmental items for growing
- Developing new methods of creating, processing, or storing product
California’s R&D tax credit is a rate of 15% of qualified expenses that exceed a base amount, which looks at historical development trends. There is no limit on the amount of credit that can be claimed, so long as each year’s qualified expenses exceed that base amount. Qualified research must take place in California to qualify for the credit. Eligible expenses include wages of individuals conducting research or development activities, supplies consumed during research process, or contractor expenses incurred to assist with development.
How Cherry Bekaert Can Help
Cherry Bekaert’s Tax Credits & Incentives Advisory practice is comprised of trusted advisors focused on identifying and delivering tax credits and incentive opportunities for clients in the cannabis industry, which include California-specific benefits that can further improve your bottom line. We will assist with the application process and do everything possible to ensure the credits are approved by the state. We will also analyze the interplay between various credits to maximize your benefits.
