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Adult Use of Marijuana Act

The Adult Use of Marijuana Act, Proposition 64, passed on November 8, 2016. We are considering the impacts to income taxation and will update this page as needed.

Medical Marijuana Related Activities

The Compassionate Use Act of 1996 and the Medical Marijuana Program Act (MMPA) authorized the use of medical marijuana (cannabis) and established guidelines for its lawful cultivation, use, and distribution.

In 2015, California passed 3 new medical marijuana laws: Assembly Bills 243 and 266, and Senate Bill 643. We will provide additional information as the implementation develops and we know more. In the meantime, here is information to help with questions you might have about your medical marijuana related activities.

Do I Need to File?

California taxes its residents on all income, including income from medical marijuana related activities. California taxes non-residents on income from California sources. All income apportioned to California by business entities is taxable. Medical marijuana-related activities conducted in California by business entities, including entities organized as nonprofit entities/businesses, are also taxable.

Find out if you have an income tax return filing requirement:

Cooperatives and Collectives

Medical marijuana businesses are to operate as a nonprofit cooperative or collective under current law.

The California Department of Justice published guidelines providing that businesses may operate as statutory cooperatives (incorporated) or as a collective (either incorporated or unincorporated). For more information, see Section IV (Guidelines Regarding Collectives and Cooperatives) of the published guidelines.

Although some medical marijuana businesses formally incorporate as nonprofit mutual benefit corporations or nonprofit mutual benefit cooperatives, they do not meet the requirements for income tax exemption described in Internal Revenue Code Section 501(c) or California Revenue and Taxation Code Section 23701.

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

Organizations operating outside the guidelines published by the California Department of Justice by following any other type of business structure must still file an annual tax return.

Individuals

Individual persons engaged in marijuana-related activities resulting in income must report the income on their personal income tax returns on Schedule C.

Deductions and Credits

  • Individuals[1] – Medical marijuana businesses operating under California's personal income tax law may deduct cost of goods sold (COGS). However, they are not allowed to deduct business expenses, such as rent and wages. 
  • Corporations and Unincorporated Associations[2] – Medical marijuana business entities operating under California's corporation tax law are allowed to deduct COGS, as well as business expenses. 
  • Tax Credits – Medical marijuana businesses may be eligible to generate tax credits, as long as they meet the specific requirements for the particular credit. The tax credits of a medical marijuana business that operates as a cooperative or collective generally do not flow through to the members.

Record Keeping

It is very important that you keep accurate and complete records. We understand the challenges facing the medical cannabis industry, but California law requires that you keep sales and purchase records, receipts, and normal books of account to support your income and deductions. Find additional keeping records information.

Paying your Tax

If you have a tax liability related to your medical marijuana business and would like to make a payment, see Payment Options.

Sales and Use Tax Information

Medical marijuana and marijuana-related products are generally considered tangible personal property. Without a specific exemption, sales of such property are subject to tax. For more information, see the Board of Equalization's Tax Guide for Medical Cannabis Businesses.

Additional Information

Contact Information

Email: FTB Medical Cannabis

[1] Includes eligible business entities operating under the California Personal Income Tax Law in Part 10 of the California Revenue and Taxation Code.

[2] Includes eligible business entities electing to be taxed as a corporation, non-profit organizations, and collectives. These entities/organizations are taxed under the California Corporation Tax Law in Part 11 of the California Revenue and Taxation Code.

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