MyFTB accountNew law will help California cannabis businesses November 2019 Tax News
In October, Governor Newsom signed Assembly Bill 37 into law, eliminating California's conformity with Internal Revenue Code (IRC) Section 280E for licensed Personal Income Tax (PIT) cannabis businesses.
Background
Californians legalized recreational and medicinal cannabis with the passage of Proposition 64 and the Legislature's passage of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). At that time, California conformed to IRC Section 280E for taxpayers operating under the PIT Law, such as:
- Individuals operating sole proprietorships
- Partnerships and their partners
- PIT investors in S-corporations
- Limited Liability Companies treated as partnerships and their members
IRC Section 280E does not allow deductions, other than cost of goods sold, for cannabis businesses.
What is changing with the new law?
Licensed (under the MAUCRSA) PIT cannabis businesses may now deduct ordinary and necessary business expenses on their California income tax return. The bill is effective for taxable years beginning on or after January 1, 2020, and before January 1, 2025.
What about unlicensed businesses?
Unlicensed businesses operating under the Personal Income Tax Law are still subject to the restrictions of IRC Section 280E and may only deduct cost of goods sold, not ordinary and necessary business expenses.
Are corporations affected by this new law?
Cannabis businesses operating under California’s corporate tax law have not been subject to IRC Section 280E and may continue to deduct both cost of goods sold and ordinary and necessary business expenses.
Where can I get more information?
Visit our cannabis webpage for additional information on businesses income taxes.