Lawmakers Demand IRS Cannabis Tax Guidance as Industry Faces Confusion
Congressional members push Treasury for clarity on cannabis taxation amid ongoing federal-state legal conflicts.
Close-up of a hand writing on tax documents with a black pen.
Congressional Letter Targets 280E Ambiguity
Lawmakers sent a formal letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel requesting immediate guidance on cannabis tax treatment. The letter, signed by members from both chambers, highlights confusion over which business expenses qualify as cost of goods sold versus disallowed deductions under Section 280E of the Internal Revenue Code.
Section 280E prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses. Cannabis remains a Schedule I drug federally despite legalization in 38 states for medical use and 24 states for adult use.
The cleanest read on this request? Timing. With DEA rescheduling proceedings stalled and no legislative fix in sight, operators need workable IRS guidance to survive audits.
Audit Pressure Escalates for MSOs
Cannabis operators report a 340% increase in IRS audit notices since 2024, according to industry tax advisors. Multi-state operators face effective tax rates exceeding 70% when 280E disallowances are applied to state-legal businesses.
- Trulieve disclosed $89 million in contested 280E adjustments in its Q1 2026 10-Q filing
- Curaleaf set aside $112 million in reserves for potential IRS assessments
- Green Thumb Industries reported $67 million in disputed deductions under audit
Smaller operators are getting crushed. Regional chains in California and Michigan have cited 280E liabilities as primary drivers of Chapter 11 filings.
What Guidance Lawmakers Are Seeking
The congressional letter requests five specific areas of clarification from the IRS. First, clear parameters on what constitutes cost of goods sold for cultivators, processors, and retailers. Second, guidance on inventory accounting methods that withstand audit. Third, clarity on whether ancillary services—testing labs, compliance software, security—fall under 280E prohibitions.
Fourth, the lawmakers want IRS guidance on state-mandated fees and whether those qualify as deductible taxes. Fifth, they're pushing for safe harbor provisions that allow businesses to rely on published guidance without penalty during transition periods.
The absence of clear IRS guidance forces compliant businesses into impossible tax positions while federal-state legal conflicts remain unresolved.
Bipartisan Support Signals Urgency
The letter carries signatures from 41 House members and 12 senators spanning both parties. Republican co-signers include Representatives Nancy Mace (SC) and Dave Joyce (OH), while Democratic support comes from Representatives Earl Blumenauer (OR) and Barbara Lee (CA). Senator Cory Booker (NJ) and Senator Rand Paul (KY) lead the Senate contingent.
Why bipartisan? Cannabis businesses operate in red and blue states alike, all facing identical federal tax treatment. Political reality drives the coalition.
Treasury Response Timeline Unclear
The IRS hasn't committed to a response timeline, and Treasury typically takes 90-180 days to address congressional guidance requests. Past requests on cannabis tax issues have gone unanswered for over a year. The 2024 request for SAFE Banking Act-related tax clarity remains pending.
IRS spokesperson declined to comment on pending congressional correspondence. Treasury's Office of Tax Policy didn't respond to requests for comment by publication time.
What Operators Should Watch
The next signal will be whether Treasury schedules a public hearing or issues an advance notice of proposed rulemaking. For background on how 280E interacts with state-legal cannabis operations, see the CannIntel topic hub on Cannabis Tax and IRS Guidance.
Operators should document all expense categorizations and maintain contemporaneous records justifying COGS treatment. The IRS is targeting businesses that fail to separate direct production costs from general administrative expenses.
Three variables will determine whether this guidance materializes: DEA's rescheduling decision, the 2026 midterm election results, and whether Treasury views this as a priority enforcement issue or a political minefield to avoid.
Frequently asked questions
What is Section 280E and why does it matter for cannabis businesses?
Section 280E of the Internal Revenue Code prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses. Cannabis remains federally Schedule I, forcing state-legal operators to pay taxes on gross receipts rather than net income, resulting in effective tax rates exceeding 70% in many cases.
Which expenses can cannabis businesses deduct under current IRS interpretation?
Cannabis businesses can deduct cost of goods sold (COGS), which includes direct costs of producing or acquiring inventory—seeds, soil, utilities for grow facilities, direct labor. They can't deduct rent, marketing, administrative salaries, or most operating expenses. The line between COGS and non-deductible expenses is the core area of audit dispute.
How long will it take the IRS to respond to this congressional request?
The IRS typically takes 90-180 days to address congressional guidance requests, though past cannabis tax requests have gone unanswered for over a year. Treasury hasn't committed to a timeline, and the response depends on whether the agency views this as a priority enforcement issue.
What should cannabis operators do while waiting for IRS guidance?
Operators should document all expense categorizations with contemporaneous records, clearly separate direct production costs from general administrative expenses, use consistent inventory accounting methods, and consider setting aside reserves for potential IRS assessments. Consult a cannabis-specialized tax advisor to ensure COGS classifications withstand audit scrutiny.
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