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Cannabis business income tax

Cannibis.

A cannabis business files income tax returns just like other businesses. Differences may include deductions, credits, and unique payment and record keeping methods.

File your income tax return

Different business types have specific tax requirements. The business type (entity type) you choose impacts the types of deductions and credits you can take. For information on starting a business, different types of businesses, or on how to convert from not-for-profit to for-profit, go to Secretary of State.

Find out if you have an income tax return filing requirement for your business. For information on selecting an income tax return preparer, refer to FTB 982.

Select your business type

Individuals file and report this business income on their Form 540 or 540NR. If your cannabis business is a sole proprietorship, you report business income and expenses using Federal Form Schedule C, Profit or Loss from Business or 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, see FTB 3556, Limited Liability Company Filing Information.

Here are some specific details to help you file:

  • Expenses and deductions: You may deduct cost of goods sold. You may not deduct other business expenses, such as rent and wages. For more details, review Internal Revenue Code 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.

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

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.

Here are some specific details to help you file:

  • Expenses and deductions: You may deduct cost of goods sold. You may not deduct other business expenses, such as rent and wages. For more details, review Internal Revenue Code 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.

For more filing information, review Partnership and Limited Partnership, Limited Liability Partnership, or Limited Liability Limited Partnership.

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.

Here are some specific details to help you 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.

Here are some specific details to help you 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.

    The Schedule K-1 that the S corporation provides to its shareholders should not include ordinary and necessary business expenses such as wages and rent. Those expenses are not deductible at the S corporation shareholder level because of Internal Revenue Code section 280E.

  • 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.

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

Here are some specific details to help you 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.

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.

  • Expenses and Deductions: You may deduct cost of goods sold reported to you on your K-1 by your S corporation or partnership. You may not deduct other business expenses, such as rent and wages. For more details, review Internal Revenue Code section 280E.
  • Credits: You may receive business tax credits if your S corporation or partnership 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.

Collectives and cooperatives in existence prior to 2018 may continue to operate if the legal requirements for operating a cannabis collective or cooperative are observed. Those collectives and cooperatives must obtain a state license by January 9, 2019, in order to continue their operations after that date.

Additional information is available from the Bureau 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.

More cannabis filing information

  • Principal business activity (PBA) code: Select the PBA code that most closely matches your business operations. To find your PBA code, review the instructions for federal Schedule C (Form 1040), line B.
  • Nonresident investors: Nonresidents that invest in California cannabis businesses may have to pay California income taxes (refer to FTB Publication 1100).

Pay taxes

To make a payment, go to Payment Options.

Cash payments: Generally, we do not accept cash payments for taxes. If you must pay in cash to avoid undue hardship, you can apply for an exemption. You must include a Currency Deposit form with your cash payment. Watch our short video to learn more about our no cash policy exemption request process.

Record keeping

We recognize that cannabis businesses face unique challenges, including keeping business records.

You must keep accurate and complete records to support your income and deductions for your income tax returns. This includes sales and purchase records, invoices, receipts, and other books related to your income and expense transactions.

You can view a short video on recordkeeping for cash-based businesses, and visit keeping records for more information.

Contact us

For questions about cannabis income taxes, email FTB Cannabis.

Cannabis business resources

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Last Updated: 10.22.2018

 

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