For taxable years beginning on January 1, 2020, California will now allow cannabis businesses operating as individual sole proprietorships, limited liability companies taxed as partnerships and S Corporations to claim deductions and credits paid or incurred in conducting commercial cannabis activity pursuant to CA R&TC Section 17209). CA R&TC Section 17209 decouples California law from Internal Revenue Code Section 280E for state legal cannabis businesses operating under the California personal income tax law.
To claim these deductions and credits previously disallowed (which applied to selling, general and administrative expenses), taxpayers will have to complete CA Form 4197 which summarizes total deductions, credits, exclusions, and exemptions used for reporting purposes to the California Legislature.
This legislation is set to expire effective December 1, 2025 and is only applicable to California licensed cannabis businesses (e.g., black/grey market operators are not entitled to claim these additional deductions and are only entitled to deduct Cost of Goods Sold).
Dana R. Borys, An Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies in the cannabis industry. Building connections beyond the code.