Limitations on Cannabis Related Expenses in California
By: Sharon Lu
December 1, 2016
California State Law: Personal Income Tax vs. Corporate Income Tax
Section 280E of the U.S. Tax code prohibits businesses from deducting ordinary and necessary business expenses. With regards to California, individuals are bound by this limitation. However, the 280E tax code does not automatically apply to corporations in California. The reason is that “California policy makers are required to affirmatively conform” to the federal tax law, by which this is not the case here.
For individuals in California, taxpayers are prohibited from deducting any ordinary and necessary business expenses.
On the other hand, an entity taxed as a corporation and involved in medical marijuana businesses is allowed to deduct its business expenses.
The following can be found on the State of California Franchise Tax Board website.
Personal Income Tax:
“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.”
Corporate Income Tax:
“Medical marijuana business entities operating under California's corporation tax law are allowed to deduct COGS, as well as business expenses."
"Medical Marijuana – State and Federal Income Tax Law." Medical Marijuana - State & Federal
Income Tax Law | California Franchise Tax Board. State of California Franchise Tax Board,
n.d. Web. 12 Dec. 2016.
"Medical Marijuana Related Activities." Medical Marijuana Related Activities | California Franchise
Tax Board. N.p., n.d. Web. 12 Dec. 2016.
"Blog." California Cannabis CPA. N.p., 10 Nov. 2016. Web. 12 Dec. 2016.