California's governor signed Bill AB 37 into law, which will allow cannabis businesses to deduct business expenses from their 2020 taxes. This bill does not apply to 2019 tax returns.
Benjamin Franklin is credited as saying, "... in this world nothing can be said to be certain, except death and taxes." Neither is a very pleasant thought, but in California, the cannabis industry will see a welcome tax break starting next year.
Legitimate businesses, even home-based ones, are allowed to deduct common business expenses from their income tax returns. The cannabis industry, however, has not had that luxury, thanks to Section 280E of the Internal Revenue Code. As the National Cannabis Industry Association explains it:
Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance.
Taxing the Cannabis Industry
Prior to 2020, businesses in the cannabis industry, such as dispensaries, growers, and processors, have been taxed solely on their gross income. Without deductions, this places them in the 70% tax rate. Conversely, businesses who are allowed to deduct their expenses generally wind up in the 30% tax rate, allowing them to keep more of their gross income. The table below breaks down how much more a cannabis business pays in taxes.
Thanks to AB 37, cannabis businesses in California will be able to keep more of the revenue they earn rather than giving it all to Uncle Sam starting next year.
Unfortunately, this only benefits cannabis businesses in California. Once cannabis is federally legalized/decriminalized, it will benefit all states.