Missouri marijuana businesses await IRS rules on promised federal tax relief

Missouri marijuana businesses had reason to celebrate in April when the federal officials moved medical marijuana into a less restrictive category of controlled substances.

The federal order could also set marijuana companies on a path to substantial federal tax savings. For years, federal law has prevented many cannabis businesses from deducting ordinary expenses — including employee salaries, rent and other costs — when calculating their federal taxes.

But months after the change, Missouri businesses still don’t know exactly how to claim those savings, especially if they sell both medical and recreational marijuana.

That uncertainty was a key topic this month on the Missouri Division of Cannabis Regulation’s DCR OutLoud podcast, where leaders of the Missouri Cannabis Trade Association said they’re waiting for federal tax officials to explain how the new rules will work.

“Not only is the cannabis industry here in Missouri one of the most regulated industries, but it’s also one of the most taxed,” said Andrew Mullins, executive director of the association.  

The federal tax rule at the center of the debate is known as Section 280E. It generally prevents businesses that sell certain federally prohibited drugs from deducting everyday business expenses. This prohibition results in an effective income tax rate on marijuana businesses of as high as 80%, compared to the standard federal corporate rate of 21%. 

Missouri already allows licensed marijuana businesses to deduct those expenses on their state income tax returns, but the federal restriction has remained in place.

The April order moved marijuana regulated under state medical licenses into Schedule III but left recreational marijuana in Schedule I. That leaves businesses that sell both types of cannabis with a difficult question: How much of their spending can they deduct?

“Certainly they’re all very anxious to see if relief is on the way and if we’re going to see that guidance from the IRS that basically directs what they can do…” Mullins said. 

In late September, the U.S. Department of the Treasury and Internal Revenue Service listed Section 280E guidance among their priorities for the coming fiscal year, which runs through September 2027. But the list includes more than 100 other tasks.

Amy Moore, director of the Missouri Division of Cannabis Regulation, said the federal order creates a particular challenge for states such as Missouri, where many businesses handle medical and recreational sales under the same license.

“In our state, the difference between medical and just adult-use consumer product really only comes into play at that moment of sale when a particular tax rate is applied,” Moore said on the podcast. “But that [Department of Justice] order seems to be really organized around medical marijuana.”

Drew Lammert, chair of the trade association’s government affairs committee, said businesses may have to make their own decisions about how to divide expenses between medical and recreational sales while they wait for federal guidance.

Lammert is also the co-founder of High Fidelity Brands, where he says medical marijuana sales make up only 10% of the company’s business. 

“We are excited, but there’s also those questions of the unknowns,” he said, “and what does that mean for the 90% of adult use sales out there.”

Separating the weed

Missouri issues what it calls “comprehensive licenses,” allowing businesses to serve both medical marijuana patients and recreational customers.

At cultivation facilities, plants also aren’t separated into medical and recreational categories as they grow.

“That is the beauty of the comprehensive license,” Lammert said. “There’s a lot of burden taken away with trying to track two separate systems, medical versus adult use.”

That arrangement makes operating a business simpler. But it could make the new federal tax rules harder to apply.

If a company grows the same plants, uses the same staff and operates out of the same buildings to supply both medical patients and recreational customers, it must determine which costs belong to its medical business — the part that may qualify for federal tax deductions.

“At retail, it’s simple,” Lammert said. “The person is either purchasing as a medical patient or purchasing as an adult-use consumer. But it gets a little more complicated when you go upstream to manufacturers and cultivators.”

Lammert said his team has considered using the percentage of dispensary sales made to medical patients to estimate how much of the company’s growing and manufacturing costs should count toward its medical business.

“These are just some of the things that I think we’re going to have to figure out if we don’t get any further distinction or guidance as to how comprehensive licenses are going to be handled under this new rescheduling order,” he said. 

Moore said she had heard another possible approach: using the medical share of sales across Missouri’s entire cannabis market to determine how much of each company’s expenses qualify.

“I imagine that some licensees that have a higher percentage of medical would not be particularly satisfied with that,” she said. “I certainly don’t have any answers on how this is going to go.”

The financial stakes could be substantial, Lammert said. 

“If all of a sudden our businesses are allowed to take those standard business deductions,” he said, “I can write off the 30 people we have at our corporate headquarters and all those salaries. The lease on our corporate office, all that now becomes deductible.”

Preparing for tax season without answers

The Treasury Department and IRS said in April that they expect the rescheduling order to have “significant positive tax consequences” for medical marijuana businesses.

But Kevin Jednachowski, chief value officer of the Denver-based Mindtrix Accounting firm, told The Independent this month that companies need more than the federal order to file their tax returns – and it’s unclear when the IRS will get to the items on its to-do list.

“Items slip,” Jednachowski wrote in a blog post on his website. “Some never get issued. The guidance, when it comes, may be narrower than the statements that preceded it.”

Until federal officials explain how the new rules work, cannabis companies must decide how to plan for their tax bills.

“Here is where the uncertainty turns into dollars,” he said. “If you are a C corporation, your last 2026 estimated payment is due Dec. 15.”

If companies underpay, they’ll owe penalties and interest on top of the tax. But if they overpay, they might not see that money back from the IRS for a while. 

“There is no clean answer, and we are not going to pretend there is one,” Jednachowski said. “The position most operators can defend is to pay estimates on a basis you can support today, and document why.” 

Jednachowski recommends that businesses prepare three estimates of what they might owe in 2026.

The first would assume nothing has changed and that the business receives no tax relief. The second would estimate the savings from medical marijuana sales, using a reasonable method to divide costs between medical and recreational operations. The third would calculate the largest tax savings the company could reasonably justify.

Comparing those estimates would help companies understand how much money they might owe under different outcomes.

“For many operators that gap is large enough to affect payroll, vendor terms, or a planned build-out,” he said. “Know how big the gap is today. Do not discover it in March.”

He also recommends that companies start keeping detailed records of the costs tied to their medical operations, including employee time, facilities, inventory and fees. They should document how they divide shared expenses and keep the information supporting those decisions.

That way, if federal officials eventually set different rules, businesses can adjust their calculations and explain how they arrived at their original figures.

“If new guidance prescribes a different approach, you can adjust and show why,” he said. “If it doesn’t, you already have a documented position. Almost every scenario depends on being able to say which dollars belong to which side of the business.”