Cannabis-related bills signed into law by California Gov. Gavin Newsom are significant steps in both providing marijuana businesses with the ability to write off business costs on state tax returns as well as normalizing cannabis as an agriculture commodity for cultivators.
On Oct. 12, Newsom signed Assembly Bill 37, which will allow California’s cannabis businesses to deduct expenses on state income tax returns.
“This shows a lot of intent from the state to support the industry,” said Avis Bulbulyan, a longtime Los Angeles-based cannabis consultant.
“It’s a move in the right direction.”
The former might free up additional farmland for cannabis cultivation. The latter paves the way for the state to compile annual reports on the California cannabis crop, much like what’s now done for more traditional commodities such as grapes, almonds and lettuce. That could provide useful data for cannabis entrepreneurs.
“These two bills (SB 527 and 657) were very important in normalizing cannabis and hemp as agriculture at both the state and county levels,” said Max Mikalonis, a legislative advocate at K Street Consulting in Sacramento.
Starting next year, AB 37 will allow California deductions for marijuana businesses filing taxes as sole proprietors or partnerships. But businesses are still barred from taking federal tax deductions under Section 280E of the IRS tax code.
While Bulbulyan admitted some cannabis companies will benefit, he played down the impact on the state’s entire cannabis market.
According to Bulbulyan, most California marijuana businesses are set up as limited liability companies (LLCs) or corporations and won’t benefit from the new legislation.
He estimated that 10% or less of plant-touching cannabis firms in the state are sole proprietors or partnerships, and he doesn’t believe many of the businesses will restructure just for the tax break.
Many cannabis businesses raise money through LLCs, for example, he said.
But this “baby step” is still a good outcome for the cannabis economy, Bulbulyan noted.
“As an industry, we have to take every win we can get,” he added.
MJ, hemp farms considered agricultural land
Separately, SB 527 considers marijuana and hemp farms agricultural land under a financial incentive for the preservation of farmland.
The California Land Conservation Act of 1965, otherwise known as the Williamson Act, authorizes a city or county to contract with a landowner to limit the use of agricultural land located in an agricultural preserve designated by the city or county.
Growers who designate their lands for compatible use pay less in property taxes as an incentive to conserve agricultural land.
While this likely will have the most benefit for hemp farmers who have larger acres, there are, for example, several dozen smaller homestead marijuana growers in Mendocino and Humboldt counties with land designated under the Williamson Act, said Hezekiah Allen, a longtime California marijuana advocate.
“It will have an impact on a handful of licensed growers,” added Allen, who now runs Emerald Grown, a cooperative of small-scale growers from the Emerald Triangle.
“It will be just like any other crop in their portfolio for property-tax purposes. It’s great normalization.”
Defining marijuana as an agricultural crop through this bill should open up agricultural farmland that’s been designated under the Williamson Act to cannabis cultivation.
Some counties in the state were reluctant to allow cannabis cultivation on land designated for conservation, and this removes that barrier.
It also essentially recognizes marijuana and hemp as safely regulated agricultural products.
SB 657 provides a reporting process for cannabis similar to the state’s annual crop report.
It authorizes county agricultural commissions to report to the California Department of Food and Agriculture about the condition, production levels and value of marijuana in the same way most other agricultural commodities are logged by the state.
The information will help to determine which of California’s counties or regions has the largest amount of cannabis cultivation. In other words, it helps to provide more intelligence on what the market is seeing or doing.
This could prove useful when attracting investment by proving to would-be financiers how much value a region can offer, said Pamela Epstein, attorney and chief regulatory and licensing officer for Eden Enterprises, a vertically integrated cannabis company in Oakland.
It could also help determine how exactly cannabis stacks up against other agricultural products such as wine, said Mikalonis.
A good sign
These pieces of legislation will reinforce the legitimacy of cannabis growers, said John De Friel, CEO of Raw Garden in Buellton, California.
“This new legislation gives the deserved legitimacy to legal cannabis and hemp as agricultural products,” he added.
These laws should be seen as more “symbolic” than anything, but the symbol is important and advances the cause of cannabis being treated like any other commodity, said Allen.
According to Allen, state Sen. Bill Monning, a Democrat, has been considered by many in the industry to be pro-enforcement, proposing bills to increase penalties and fines for cannabis companies.
Allen sees the support from senators such as Monning coming as a direct result of confidence in California’s strict regulatory program.
“So it’s exciting to see him author what I would consider a pro-business bill,” Allen added.
Allen said he’s hearing from a lot of licensed cannabis companies that the state’s stringent regulations are causing “death by a thousand paper cuts.”
“That’s one of the hardest situations to deal with,” he added. “We should celebrate it when there are a few less.”
Bart Schaneman can be reached at [email protected]