Cannabis Industry

Individuals file and report this business income on their Form 540 or 540NR. If your cannabis business is a sole proprietorship, report business income and expenses using either:

• Federal Form Schedule C, Profit or Loss from Business
• Federal Form Schedule F, Profit or Loss from Farming

An individual owner of a single member LLC (SMLLC) that is treated as a disregarded entity, reports the income on Schedule C or Schedule F. The SMLLC must also file the Form 568 and pay the annual tax and its LLC Fee. For more information, reference Limited Liability Company Filing Information (FTB 3556).

How to file

Expenses and deductions

Licensed cannabis businesses may deduct cost of goods sold and all ordinary and necessary business expenses, such as rent and wages.

Unlicensed cannabis businesses may deduct cost of goods sold but may not deduct other business expenses such as rent and wages. For more details visit Internal Revenue Code (IRC) section 280E.

Credits

You may receive business tax credits if you meet the specific requirements for the particular credit.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

New form for the 2020 tax year

A licensed cannabis business operating as a sole proprietorship or as a single member limited liability company reports its total deductions and credits on the Information on Tax Expenditure Items (FTB 4197).

If your cannabis business is a partnership, you report business income and expenses using CA Form 565 or 568. Individual partners report their share of this business income on their Form 540 or 540NR.

How to file

Expenses and deductions

Licensed cannabis businesses may deduct cost of goods sold and all ordinary and necessary business expenses, such as rent and wages.

Unlicensed cannabis businesses may deduct cost of goods sold, but may not deduct other business expenses, such as rent and wages. For more details, visit Internal Revenue Code (IRC) section 280E.

California does not allow Cannabis as a medical expense deduction, including medical deductions on Schedule A.

Credits

You may receive business tax credits if you meet the specific requirements for the particular credit, and operate a licensed cannabis business. Unlicensed cannabis businesses cannot claim business credits.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

For more filing information, visit:

• Partnership and Limited Partnership
• Limited Liability Partnership
• Limited Liability Limited Partnership

A licensed cannabis business operating as a partnership or as a limited liability company treated as a partnership reports its total deductions and credits on the Information on Tax Expenditure Items (FTB 4197).

Incorporated entities generally file a Form 100, California Corporation Franchise Tax or Income Tax Return. Cannabis cooperatives file Form 100 and are taxed like a corporation.

How to file

Expenses and deductions

If your cannabis business operates under California's corporation tax law, you can deduct cost of goods sold and ordinary and necessary business expenses.

Credits

Your cannabis business may receive business tax credits if it meets the specific requirements for the particular credit.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

If your cannabis business is an S corporation or LLC electing to be taxed as a corporation, you report business income and expenses using CA Form 100 or 100S

How to file

Expenses and deductions

For S corporation tax computing purposes, the S corporation can deduct cost of goods sold and ordinary and necessary business expenses.

S corporations must provide their shareholders with the Schedule K-1. If the cannabis business is:

• Licensed, they may include deductions for cost of goods sold and all ordinary and necessary business expenses, such as rent and wages.
• Unlicensed, they may include deductions for cost of goods sold.
• They may not include other business expenses, such as rent and wages. For more details, visit Internal Revenue Code (IRC) section 280E.

Credits

Your cannabis business may receive business tax credits if it meets the specific requirements for the particular credit.

S corporations must provide their shareholders with the Schedule K-1. If the cannabis business is:

• Licensed, they may include business credits for which the business qualifies.
• Unlicensed, they may not include business credits.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

Non-profit cannabis businesses are not eligible for California franchise or income tax exemption because they do not meet the operational requirements (IRC Section 501(c) or Revenue & Taxation Code Section 23701). These businesses must file as a taxable corporation.

How to file

Expenses and deductions

If your cannabis business operates under California's corporation tax law, you can deduct cost of goods sold and ordinary and necessary business expenses.

Credits

Your cannabis business may receive business tax credits if it meets the specific requirements for the particular credit, and operate a licensed cannabis business. Unlicensed cannabis businesses cannot claim business credits.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

You report income from your S corporation or partnership on your return. The K-1 you receive from your S corporation or partnership should not include non-deductible ordinary business expense items such as wages and rent.

How to file

Expenses and deductions

You may deduct cost of goods sold reported to you on your K-1 by your S corporation or partnership.

For deductions of other business expenses, such as rents and wages, if the business is:

• Licensed, you may deduct cost of goods sold and all ordinary and necessary business expenses, such as rent and wages.
• Unlicensed, you may deduct cost of goods sold.
  • You may not deduct other business expenses, such as rent and wages. For more details, visit Internal Revenue Code (IRC) section 280E.

You may receive business tax credits if your S corporation or partnership meets the specific requirements for the particular credit, and operate a licensed cannabis business. Unlicensed cannabis businesses cannot claim business credits.

The California research credit is based on federal law. The ability for cannabis businesses to take that credit could be limited by the federal rules, which still consider cannabis an illegal substance.

Shareholders and partners who receive a K-1 from a licensed cannabis business report their total deductions and credits on the Information on Tax Expenditure Items (FTB 4197).

Collectives and cooperatives must have obtained a state license by January 9, 2019, in order to continue their operations after that date.

Additional information is available from the Department of Cannabis Control.

Businesses wishing to change from a nonprofit mutual benefit corporation or cooperative corporation to a for-profit entity must file with the Secretary of State.