Seminar Recap: Tax Strategies for Cannabis Operators 2025

During AAFCPAs’ recent Tax Strategies for Cannabis Operators webinar (October 2025), AAFCPAs’ Cannabis practice leaders presented practical guidance to operators on navigating Section 280E compliance, optimizing cost of goods sold, managing cash flow and operational challenges, and evaluating strategies for exit planning, including Qualified Small Business Stock and employee ownership structures.

The past year for the cannabis industry has been marked by sharp fluctuations in growth and regulatory momentum. Annual sales exceed $40 billion nationwide, with more than 400,000 people employed across cultivation, processing, and retail. Cannabis is legal in 42 states plus Washington, D.C. for either medical or recreational use, and public support remains high, with polls consistently showing more than 80 percent of Americans favoring legalization.

Federal developments have offered both hope and frustration. Hints of rescheduling suggested a path toward federal and state synchronization, yet progress has stalled. Operators continue to face margin pressures, oversupply, and complex regulatory requirements. Against this backdrop, strategic planning, including tax strategies, is critical for optimizing cash flow and preparing for potential federal changes.

Tax Strategies for Cannabis Operators

Section 280E continues to shape tax planning for cannabis operators. Though it disallows deductions for ordinary business expenses tied to federally controlled substances, companies can still reduce liabilities by focusing on cost of goods sold. COGS with proper planning can be broader than cultivation alone, potentially encompassing production overhead, packaging, and certain administrative allocations directly linked to production. Reviewing past allocations for consistency not only supports defensible filings but can reveal overlooked opportunities.

How payroll is allocated and how job descriptions are structured also matters. Production roles should be clearly distinguished from administrative or sales functions, with documentation reflecting how team members actually spend their time. These distinctions are especially critical when roles straddle production and non-production activities, ensuring that expenses are properly accounted for under 280E.

Depreciation and interest tracing offer additional levers. Costs traced to production assets—whether equipment, facilities, or improvements—can shift timing and tax treatment. Thoughtful planning around capital investments, synchronized with accounting and operational practices, can preserve cash flow while maintaining compliance.

It is no secret that many operators in the industry are taking the position that 280E should not apply to state-legal cannabis businesses. Taxpayers that take this position are claiming all ordinary and necessary business costs as deductible expenses on their tax returns. In addition to acquiring a reasonable basis opinion from qualified attorneys, this position requires a host of other disclosures and considerations, such as IRS Forms 8275 and/or Schedule UTP for uncertain tax positions, to establish transparency and mitigate penalties and interest if the IRS were to ever challenge this position under audit. 

Tax planning works best when it stretches across operations. Aligning expense allocations, investment timing, and documentation with the rhythm of the business preserves cash flow, strengthens compliance, and positions operators for future growth or a strategic exit.

Cash Flow and Operational Management

Managing cash flow remains a central concern for cannabis operators, where high operating costs intersect with complex regulatory requirements. Rolling 13-week projections, coupled with longer range three- to five-year budgets, offer a forward-looking view, revealing periods of potential liquidity stress and helping businesses anticipate short-term funding needs. These projections guide decisions on inventory, payroll, and capital expenditures, allowing operators to act before pressures materialize.

Purchasing and inventory decisions carry implications beyond day-to-day operations. Monitoring turnover, anticipating seasonal demand, and timing acquisitions carefully can prevent overstocking and reduce capital tied up on the shelf. When aligned with cost of goods sold calculations, inventory practices not only support accurate tax reporting but enhance operational efficiency across cultivation, processing, and retail.

Benchmarking against peers adds context to internal metrics. Comparing labor costs, overhead, and production performance against industry standards illuminates inefficiencies and informs cost-control measures. This data-driven perspective enables more strategic decisions across all business functions, from production to administration.

Debt management and financing strategies further underpin operational resilience. Restructuring debt, negotiating forgiveness, or managing accrued interest under insolvency provisions preserves liquidity and keeps credit options available. Coordinating these actions with cash flow projections and operational planning ensures that financing decisions reinforce rather than conflict with broader business strategies.

Taken together, disciplined cash flow oversight, strategic purchasing, and thoughtful debt management provide a foundation for navigating today’s market pressures while maintaining flexibility for potential shifts in federal regulation.

Exit Planning Strategies

Qualified Small Business Stock (QSBS) gives cannabis operators a pathway to reduce capital gains taxes when selling a business. Eligibility hinges on meeting ownership thresholds and actively running the business for a required holding period. Certain assets, including those tied to investment or real estate activities, are excluded. Timing plays a critical role: careful allocation of QSBS-eligible stock and meticulous tracking of holding periods can preserve benefits, while missteps risk disqualification and lost tax savings.

Employee Stock Ownership Plans (ESOPs) present another option for succession and long-term team member engagement. Setting up an ESOP requires coordination across legal, tax, and operational considerations—valuing the business, determining contribution schedules, and ensuring compliance with ERISA rules. While the process carries upfront costs and administrative demands, it offers owners a path to liquidity, aligns team members with company performance, and can reinforce long-term strategic goals. The real advantage comes when structure and timing are deliberate, turning a complex tool into a practical solution. However, the real advantage of the ESOP is the federal tax savings. If the ESOP is structured and administered appropriately, the taxpayer may not have to pay any taxes to the IRS, effectively neutralizing the effects of 280E. For these reasons, the ESOP is a powerful tool that, despite being complex, provides practical solutions.

Exit planning ultimately demands careful alignment of tax, accounting, and operational decisions. Proactive measures help reduce compliance exposure, sustain cash flow through transitions, and support growth or eventual sale. Each business presents a distinct landscape; the timing of decisions, ownership structure, and internal operations all shape outcomes. Approaching exit strategy with thoughtful planning positions operators to navigate both the immediate pressures of the industry and the long-term opportunities that lie ahead.

How We Help

AAFCPAs has been advising cannabis operators since 2012, providing tax, audit, advisory, and outsourced accounting solutions across the United States. Our multi-disciplinary team includes CPAs, consulting CFOs, tax attorneys, wealth advisors, and process, technology, and risk advisory specialists, all focused on helping operators navigate complex federal and state regulations while improving cash flow and operational efficiency. We support operators at every stage, from start-ups and cultivation to manufacturing, wholesale, and retail, offering strategies to optimize Section 280E compliance, manage multi-state tax obligations, and plan for growth, succession, or exit. We provide data-driven consulting that enhances operations, inventory management, and financial planning, while our Outsourced Accounting and Fractional CFO services deliver flexible financial leadership and oversight. Recognized nationally, we also advise on accounting methods, capital structure, debt management, and M&A, while maintaining active engagement with industry trends, networks, and best practices to ensure our clients are positioned for sustainable success in a rapidly evolving market.

These insights were contributed by David McManus, CPA, CGMA, Tax Partner & National Cannabis Practice Leader; Janice O’Reilly, CPA, CGMA, Partner; Joshua England, LLM, Esq., Partner & Tax Attorney; David Gravel, CPA, MPAc, Tax Director; and Tomás A. Pueyo, Jr., CPA, MSA, Tax Director.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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