California provides tax credits for cannabis businesses

California provides two new tax credits for cannabis businesses for tax years 2023 through 2027. One is for so-called “high-road” employers who meet specified employment requirements. The other is for cannabis equity licensees.

Taxpayers may claim the credits against:

• corporate franchise and income taxes; or
• personal income tax.

The credits were enacted as part of a larger cannabis tax relief bill.

Who qualifies for the high-road cannabis employer credit?

California-licensed commercial cannabis retailers or microbusinesses may claim the high-road cannabis employer credit for qualified expenditures. Businesses must provide their full-time employees with all of the following:

• employment compensation;
• employer-provided group health insurance; and
• employer-provided retirement or pension benefits.

What expenditures qualify for the credit?

Qualified expenditures for credit purposes are amounts paid or incurred for:

• employment compensation for full-time employees who are paid no less than 150% but no more than 350% of the applicable minimum wage;
• safety-related equipment, training, and services; and
• workforce development for employees.

How much is the credit?

The credit equals 25% of the qualified expenditures in the tax year, up to $250,000. The total amount of credits allocated to all taxpayers for all tax years must not exceed $20 million.

If the credit exceeds the amount of tax due for the year, the taxpayer may carry forward the excess for up to eight years.

Who qualifies for the cannabis equity licensee credit?

Cannabis business owners that qualify for a license fee waiver under the state’s cannabis equity program may claim the cannabis equity licensee credit. The cannabis equity program provides support to business owners harmed by cannabis criminalization.

How much is the credit?

The cannabis equity licensee credit amount is $10,000.

If the credit exceeds the amount of tax due for the year, the taxpayer may carry forward the excess for up to eight years.

What other state income tax relief is available?

Federal law prohibits deductions for expenses incurred in connection with the illegal sale of drugs. This applies to expenses of cannabis businesses, even though many states have legalized the sale of cannabis/marijuana for medical and/or recreational use. The prohibition applies because the sales remain illegal under federal law. Many states (most recently, New York and Massachusetts) have responded by indicating that they will allow deductions for the expenses that are not deductible under federal law. 

Connecticut provides a credit for angel investors in approved cannabis businesses. But, most states do not yet provide income tax credits specifically benefiting cannabis businesses.