Missouri’s cannabis industry is facing a major tax question after federal officials took steps this year to ease restrictions on medical marijuana.
The change could allow qualifying cannabis companies to claim federal deductions for routine business costs such as rent, wages, and other operating expenses. For years, those deductions have largely been blocked by Section 280E, which applies to businesses dealing in substances prohibited under federal law.
The potential savings are significant. Cannabis companies can face effective federal tax rates approaching 80%, compared with the 21% corporate rate applied to many other businesses.
Yet Missouri operators are still waiting for clear instructions on how the new rules will apply, particularly because the state permits companies to serve both recreational consumers and medical patients.
That issue came up during a recent discussion by the state cannabis regulators. Representatives of the state Cannabis Trade Association stated that businesses need direction from the IRS before they can confidently determine which expenses qualify.
Andrew Mullins, the association’s executive director, described cannabis as one of Missouri’s most heavily regulated and taxed industries.
Under the federal action announced in April, marijuana covered by state medical programs was moved into Schedule 3 of the Controlled Substances Act. Recreational cannabis, however, remained in Schedule 1.
That distinction creates complications for Missouri companies operating under comprehensive licenses, which permit both types of sales. The state does not require businesses to maintain separate cultivation systems for medical and adult-use products.
Amy Moore, who leads Missouri’s marijuana regulatory division, said the federal approach appears to distinguish medical marijuana in a way that does not neatly match Missouri’s licensing structure.
Drew Lammert, who chairs the trade group’s government relations committee, said companies may ultimately need to develop their own methods for assigning shared expenses. His cannabis company gets roughly 10% of its revenue from medical sales.
One possible method would be to use the proportion of dispensary purchases made by medical customers when allocating costs incurred by cultivators and manufacturers. Another proposal discussed by regulators would rely on the medical portion of sales statewide.
Neither approach has been endorsed by federal tax authorities.
The IRS and the Department of Treasury have identified Section 280E guidelines as a priority for the next fiscal year, but that list contains over 100 other projects.
Tax adviser Kevin Jednachowski has urged operators to prepare for several possible outcomes rather than assume relief will arrive on schedule. He advises businesses to estimate their potential tax bills under different outcomes, from receiving no tax relief to claiming the largest deductions they can reasonably justify.
For companies, the difference could affect cash flow, expansion plans, payroll, and supplier arrangements. Detailed records may also become critical. Businesses can begin documenting inventory, facility expenses, employee time, and other shared costs now, giving them evidence to support whatever allocation method they eventually use.
This tax guidance lacuna isn’t only affecting businesses in Missouri. Even firms like Green Thumb Industries Inc. (CSE: GTII) (OTCQX: GTBIF) in other legal markets could also be awaiting guidance from the IRS.
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