The cannabis industry in California has grown exponentially in recent years even though marijuana and cannabis still remain illegal under federal law. The legal differences at the state and federal levels create issues around compliance with regard to taxation, banking and financing for cannabis businesses.
Fortunately, cannabis businesses can benefit from California’s new laws, such as Assembly Bill 37 (AB37), which provides a more conducive environment for them to thrive. Here is what you need to know.
What has changed with the new law?
According to Section 280E of the Internal Revenue Code, businesses that traffic substances controlled at the federal level (such as marijuana) are not supposed to deduct normal business expenses when filing their taxes. They can only deduct the cost of goods sold. The law is intended to prevent organized crime syndicates from benefiting from tax deductions.
However, since cannabis industries in California operate legally under state laws, AB 37 was passed in 2019, effective January 1, 2020. Essentially, the law allows cannabis enterprises to deduct the necessary business expenses when reporting on their California state income tax returns.
Is your business affected by AB37?
Not all cannabis enterprises can benefit from AB 37 regarding tax deductions. Only businesses licensed under The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) can take advantage of the tax deductions. Unlicensed businesses that operate under the Personal Income Tax laws still have to adhere to IRC’s Section 280E.
Are you facing any concerns around cannabis taxation?
If you are dealing with any issues with your hemp, CBD or cannabis enterprise in California, it is crucial to seek an informed perspective as you proceed. Compliance with the law will protect your business from any legal consequences that could affect its future.