This is a technical explanation of California law: Corporations can deduct, on their California state income tax returns, their expenses for advertising and marketing marijuana. But individual businesses cannot. Pass-throughs to individuals, like S corporations and LLCs, don’t provide these deductions to individuals.
Since 1982, Federal Tax Code section 280E has said sellers of federally illegal drugs, like cannabis, can deduct only “cost of goods sold” – the cost of producing or buying the product. California follows — “conforms” to — that federal law for individuals, but not for corporations.
Most state income tax laws conform to the federal tax Code, automatically, as it changes from time to time. But California is different. What other states do might be an “unlawful delegation of legislative power.” So the Assembly hasn’t enacted the kind of automatic, ongoing conformity that’s a no-brainer in most states.
It turns out that, for some reason I don’t understand, the Legislature has enacted 280E conformity for individuals but not for corporations.
If what follows is too dense to follow, there’s a longer and more detailed explanation by California lawyer Joseph P. Wilson here, or at http://wilsontaxlaw.com/newsresources/tax-publications/taxation-medical-marijuana-dispensaries-part-2/. (“Does this mean that corporations get breaks that individuals do not? Well, in this particular circumstance, the answer is yes, corporations do.”)
But here’s a quick Technical Background, if you want to wade through it:
- Conformity for individuals – no deductions:
The California statutes say that 280E, and all of Part IX of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, which contains 280E, applies to individuals. Here is section 17201, in the Individual Tax section: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=17001-18000&file=17201-17299.9
(a) Part VI of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to itemized deductions for individuals and corporations, shall apply, except as otherwise provided.
(b) Part VII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to additional itemized deductions for individuals, shall apply, except as otherwise provided.
(c) Part IX of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to items not deductible, shall apply, except as otherwise provided.
The federal Part IX cross-referred to in (c), found at http://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-B/part-IX, covers 280E, and much more — everything listed near it in the federal Tax Code.
So individuals can’t deduct 280E expenses. And 280F, for instance, limiting deductions for luxury automobiles, hits individuals on their California returns.
- Nonconformity for corporations – full deductions
The California statute, the corporate tax law, http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=24001-25000&file=24421-24449 conforms, for corporations, only with selected parts of Part IX, like 263A, 264, and 280H. 280E is not listed. Neither, for instance, is 280F, which limits deductions for luxury automobiles – so corporations get the big deductions for cars. And can deduct all their cannabis expenses.
But there’s a fine point covering rare cases, discussed by Attorney Wilson in the link here: If a corporation is actually found guilty of violating drug laws in certain cases, it loses deductions.
Note: a layperson’s version WAS here or http://marijuanalegalization.about.com/od/RelatedIssues/fl/Down-the-Rabbit-Hole-of-Cannabis-Taxation-and-Advertising.htm, but the link is broken as of 1-1-17.