Cannabis tax law and legislation

Keep up with the California tax law and legislation related to medicinal and adult-use of cannabis.

The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), SB 94, passed on June 27, 2017. It established a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis, and related products.

The MAUCRSA defines the power and duties of the various state agencies responsible for controlling and regulating the commercial medicinal and adult-use cannabis industry.

Current law

Cannabis businesses that have already received any required licenses or permits from their local jurisdiction may apply for state licenses to operate from the Department of Cannabis Control.

Businesses operating under these state licenses can choose any form of valid business structure for their business. They are able to operate on a for-profit or not-for-profit basis. They are not eligible for California franchise and income tax exemption, as they do not meet the requirements as described in Internal Revenue Code (IRC) Section 501(c) or California Revenue and Taxation Code (R&TC) Section 23701.

Most businesses may deduct cost of goods sold, and ordinary and necessary business expenses on their California returns. These taxpayers include:

• Sole proprietorships (including farmers)
• Partnerships
• Limited Liability Companies (LLC) taxed as:
  • Partnership
  • Disregarded Entities (Single Member LLCs)
  • Corporation
• S Corporations
• Corporations (including co-ops and collectives)

Cannabis Business licenses

Agency	License types
Department of Cannabis Control	All license types

Law prior to 2018

Medicinal cannabis businesses operated as nonprofit cooperatives or collectives prior to 2018. The California Department of Justice published guidelines that stated businesses may operate as statutory cooperatives (incorporated) or as a collective (either incorporated or unincorporated).

Cannabis businesses are not eligible for California franchise and income tax exemption. Although some medicinal cannabis businesses formally incorporate as nonprofit mutual benefit corporations or nonprofit cooperatives, they do not meet the requirements for income tax exemption described in IRC Section 501(c) or California R&TC Section 23701.

Incorporated cooperatives, incorporated collectives, and unincorporated collectives must report income by filing an annual tax return. These entities generally file a Form 100, California Corporation Franchise or Income Tax Return.

Major California cannabis legislation

• 2022: Assembly Bill 195: Created new cannabis business tax credits, the High-Road Cannabis Tax Credit, and the Cannabis Equity Tax Credit.
• 2019: Assembly Bill 37 (Effective January 2020 through December 2024): IRC Section 280E no longer applies to licensed individual taxpayers operating under personal income tax law.
• 2017: The MAUCRSA consolidated elements of the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA), Senate Bill 94. AB 133, passed on September 22, 2017, made some technical changes and removed the provision that the licensed premises for commercial medicinal and adult-use cannabis industry be separate and distinct
• 2016: The Adult Use of Marijuana Act (AUMA), Proposition 64, passed, allowing for recreational marijuana use and sale
• 2016: The Medical Cannabis Regulation and Safety Act (MCRSA), SB 837, AB 21, AB 2516, and AB 2679 expanded on the MMRSA
• 2015: The Medical Marijuana Regulation and Safety Act (MMRSA) established a regulatory structure for medical marijuana businesses (Assembly Bills 243 and 266, and Senate Bill 643)
• 2003: The Medical Marijuana Program Act (MMPA) established guidelines for its lawful cultivation, use, and distribution
• 1996: The Compassionate Use Act authorized the use of medical marijuana

Contact us

For questions about cannabis income taxes, email FTB Cannabis.