Cannabis update from the Franchise Tax Board Cannabis Business Team January 2021 Tax News

New Form for Reporting Cannabis Deductions

We continue to focus our efforts on education and outreach.

For taxable years beginning on or after January 1, 2020, California allows:

• Individuals
• Other taxpayers operating under the personal income tax law

To claim credits and deduction of business expenses:

• Paid
• Incurred in conducting commercial cannabis activity [1] (R&TC, Section 17209)

We will update our website by January 2021 to include the new Form 4197, “Information on Tax Expenditure Items.”

Taxpayers engaged in commercial cannabis activity will use the form to report tax expenditure items, including:

• Total deductions
• Credits
• Exclusions
• Exemptions

We will use the form to compile information for its required reporting to the California Legislature.

Education and Outreach

We also plan to mail more than 5,000 “Welcome Letters” to licensed cannabis businesses in January 2021. These letters will direct them to:

• Our website where they can access resources
• The new Form 4197 (to comply with their California income tax filing and payment responsibilities)

We will continue our outreach activities this year to educate cannabis businesses about their California income tax filing responsibilities. This outreach will include attending online cannabis-related events and working with industry trade groups.

Banking

We continue to work with licensed cannabis businesses to assist them in making their California income tax payments. Because banks generally do not serve cannabis businesses due to federal law, cannabis businesses often pay their California income tax in cash.

Federal law may change this year to allow licensed cannabis businesses at least some access to banking services and help them move away from cash-only transactions. The COVID-19 relief package passed by the House of Representatives in October 2020 included the Secure and Fair Enforcement (SAFE) Banking Act of 2020. However the U.S. Senate did not consider the House's legislative package. 

As of mid-December 2020, it was uncertain whether the SAFE Banking Act would be included in the economic relief package then under consideration by Congress. If the banking act is not included in an economic relief package, which was expected to be enacted in December 2020, there are indications the new Congress will consider it again during 2021.

In California, the enactment of AB 1525 in September 2020 provides some new legal protections for tax practitioners and has provisions that could help licensed cannabis businesses secure banking and armored car services. The legislation amended Business and Professions Code section 26260. Now, a person practicing public accounting does not commit a crime under California law solely by providing professional accounting services to persons licensed to engage in commercial cannabis activity. Furthermore, armored car services may do business with licensed cannabis businesses. 

The new law also authorizes a person licensed to engage in commercial cannabis activity to request, in writing, that certain state and local agencies and authorities can share the person’s application, license and other regulatory and financial information with a financial institution of the person’s designation. This could make it easier for a licensed cannabis business to forge banking relationships.