Find information about tax issues specific to the cannabis industry in the State of California. Certain rules differ from federal law in regard to marijuana taxation.

California Assembly Bill (AB37), signed into law October 12, 2019, has created a non-conformity with federal tax law by allowing non-corporate taxpayers engaged in a legal, commercial cannabis activity (i.e., a cannabis business) to deduct ordinary and necessary business expenses for tax years beginning on or after January 1, 2020, and before January 1, 2025 (extended to January 1, 2030 by SB 167, signed June 27, 2024), in computing the business’s profit or loss for state income tax purposes. This is contrary to federal law (Sec 280E) which denies any deduction or credit, except for cost of goods sold, for any business engaged in the trafficking of a controlled substance (includes cannabis).

However, AB37 only applies to the trafficking in cannabis as defined under California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) and provided the business is in compliance with all registration and licensing requirements including state and local. For full detail of AB37 visit: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB37

Form FTB 4197, “Information on Tax Expenditure Items,” will be required as part of 2020 and later year returns filed by taxpayers engaged in commercial cannabis activity to report items such as total deductions, credit, exclusions and exemptions. The FTB will use the form to compile information for its required reporting to California’s legislature. (FTB Tax News, Jan. 2021)

Note: CA Corporate tax law has never been in conformity with federal tax law in this regard and has always allowed ordinary and necessary business expenses for corporate cannabis businesses.

The FTB has a “No Cash Policy” in all field offices. This was done to streamline processes, save costs, and reduce risk to customers and state employees. Although this policy achieved the intended goals, it creates a hardship for taxpayers who are unable to open bank accounts (for example, marijuana businesses). In order to address this concern, the FTB established an exemption to the “no cash” policy that was implemented on July 1, 2016. Effective that date:

If the taxpayer is required to make mandatory e-payments, it is recommended that they also complete and submit Form 4107, Mandatory e-Pay Election to Discontinue or Waiver Request for individuals, or Form 3816, Electronic Funds Transfer Election to Discontinue or Waiver Request for business entities, each time a cash payment is made.

Governor Brown signed into law AB 1741. The law temporarily exempts a person licensed to engage in commercial cannabis activity whose estimated tax liability under the act averages $20,000 or more per month, from a requirement to remit specified taxes under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) by electronic funds transfer if the CDTFA deems it necessary to facilitate collection of amounts due. The temporary extension expired January 1, 2022. AB 1741 took effect immediately upon enactment on August 28, 2018.

At the end of 2020, Governor Newsom signed Assembly Bill (AB) 1525 into law, which added Section 26260 to the Business and Professions Code. This bill provides that an individual or firm that practices public accounting does not commit a crime under California law solely for providing professional accounting services to persons licensed to engage in commercial cannabis activity. (BPC Section 26260(d)) Which tax preparers are covered by this law? According to the February 2021 edition of the FTB’s Tax News, “Because a tax preparer who prepares or signs tax returns for clients is engaged in the practice of public accountancy AND because the new law states that persons or firms engaged in the practice of public accountancy do not violate California law for providing services to a licensed cannabis business, preparing a tax return for them does not violate California law. Therefore, if an EA, CPA or CTEC prepares or signs a licensed cannabis business’ tax return, he or she is not in violation of California law.”

Both credits are for taxable years beginning on or after January 1, 2023, and before January 1, 2028.

The amount of credit is equal to 25% of qualified expenditures, up to a maximum credit of $250,000 per taxpayer, per taxable year. An aggregate total of $20 million is available for this credit. 

Qualified taxpayers must pay wages to full-time employees of between 150% and 350% of California minimum wage. The value of certain employee benefits paid by the employer may be used to meet the 150% threshold. In addition, employers must provide group health insurance, and pension or retirement benefits to the full-time employees.   

Qualified taxpayers are required to apply for a Tentative Credit Reservation (TCR) from FTB each taxable year. Taxpayers whose taxable year begins from January through July must apply for their reservation in July of the taxable year. If the taxpayer’s taxable year begins from August through December, the taxpayer must apply for a TCR within 30 days of the start of their taxable year.