Navigating cannabis accounting and taxes is critical for dispensary success in a rapidly evolving industry. From the restrictive federal IRC Section 280E to diverse state tax structures, cannabis businesses face unique financial challenges. Effective dispensary accounting ensures compliance and maximizes profitability. This guide provides actionable strategies for managing cannabis taxes and highlights key trends to prepare for in 2026, empowering operators to thrive.
The Federal Tax Challenge: IRC Section 280E
Cannabis remains a Schedule I controlled substance under federal law, triggering IRC Section 280E. This 1982 code prohibits cannabis businesses from deducting most operating expenses—such as rent, marketing, and payroll—taxing them on gross profit rather than net income. Only the cost of goods sold (COGS), like seeds or cultivation supplies, is deductible in cannabis accounting.
In 2025, this results in effective tax rates often exceeding 70%. For example, a dispensary with $1 million in revenue and $700,000 in non-deductible expenses might owe taxes on $900,000 after a $100,000 COGS deduction, straining cash flow and limiting growth.
2026 Federal Outlook
Looking to 2026, federal reform is gaining momentum. The Cannabis Administration and Opportunity Act (reintroduced in 2025) could reschedule cannabis or amend 280E, allowing standard deductions in cannabis accounting. Bipartisan support is growing post-2024 elections, and advocacy from groups like the National Cannabis Industry Association could drive change. Rescheduling to Schedule III would reduce tax burdens, freeing capital for dispensaries. Staying updated is essential for adjusting dispensary accounting practices.
State and Local Taxes: Navigating Complexity
State and local taxes add complexity to cannabis accounting. In 2025, states use three main tax types:
- Percentage-of-price taxes: Common in California (15% excise tax plus sales tax) and Colorado (15% retail marijuana tax), these vary with market prices.
- Weight-based taxes: Alaska’s $50/oz on mature buds ensures stable revenue but may incentivize high-potency sales.
- Potency-based taxes: Illinois and New York are refining THC-based taxes to address public health, though testing accuracy challenges compliance.
Local taxes, like Denver’s retail surcharge or Seattle’s 3.6% municipal tax, increase costs. A California dispensary might face a combined tax rate exceeding 30%, impacting dispensary accounting strategies.
2026 State and Local Outlook
In 2026, states will likely refine tax policies to support legal markets. Oregon’s recent tax cut to 14.5% aims to compete with illicit sales, a trend that may spread. New York’s potency-based tax experiments could expand, with states like Massachusetts exploring similar models. Emerging markets like Ohio and Delaware, legalized in 2024, are expected to introduce streamlined taxes in 2026, offering lower rates. Dispensary accounting must adapt to these shifts for competitive pricing and compliance.
Impacts of Taxation on Cannabis Businesses
Financial Strain
The 280E restriction creates significant pressure in cannabis accounting. A dispensary with $500,000 in revenue and $400,000 in non-deductible expenses might owe taxes exceeding net income, limiting funds for expansion or innovation.
Operational Challenges
Non-deductible expenses discourage investments in employee benefits, facility upgrades, or community programs. Offering competitive wages or health insurance is costlier without deductions, impacting talent retention in 2025’s competitive labor market.
Compliance Complexity
The IRS audits about 10% of cannabis businesses annually, per 2025 data, demanding meticulous dispensary accounting. Businesses must track COGS precisely and retain receipts to avoid penalties, which can reach tens of thousands for non-compliance.
Strategies to Navigate Federal Taxes
Maximize COGS Deductions
In cannabis accounting, categorize direct production costs—like grow lights, fertilizers, or packaging—as COGS to reduce taxable income. Tools like QuickBooks with cannabis-specific integrations or CannaBooks streamline this process in 2025. Indirect costs, like utilities or shipping, remain non-deductible, requiring precise allocation.
Optimize Business Structure
Splitting operations into separate entities mitigates 280E’s impact. A cultivation entity (subject to 280E) can focus on production, while a retail entity handles merchandising or consulting, claiming standard deductions. Legal expertise ensures compliance with state licensing and federal tax rules in dispensary accounting.
Leverage Technology for Compliance
Tools like METRC for inventory tracking or cannabis-specific POS systems ensure accurate labor and expense tracking. Allocating employee time between COGS-related tasks (e.g., cultivation) and non-deductible tasks (e.g., sales) optimizes deductions in cannabis accounting.
Mastering State and Local Taxes
Stay Informed
Tax laws evolve rapidly. California’s cultivation tax faces potential reform in 2026, possibly shifting to a potency-based model. Subscribing to state regulatory updates or joining groups like the Cannabis Trade Federation provides insights for dispensary accounting.
Robust Record-Keeping
Maintain detailed records of sales, purchases, and tax payments for at least four years, as some states extend audit periods. Cloud-based platforms like Xero or Wave automate compliance, reducing errors in cannabis accounting.
Partner with Experts
Cannabis-specialized CPAs, like GreenGrowth CPAs, navigate state-specific tax codes, optimize deductions, and prepare for audits. Their expertise ensures compliance and minimizes liabilities in dispensary accounting.
Market and Regulatory Impacts
High taxes drive consumers to illicit markets, where prices are 20-30% lower, per 2025 data. States like Washington streamline licensing to reduce costs, boosting legal sales. Taxes also fund vital programs—Colorado has generated over $2.5 billion in cannabis revenue since 2014, supporting schools and infrastructure.
2026 Market Trends
In 2026, new states entering the market will increase competition. Tax relief in states like Michigan, with a proposed 10% tax cap, could undercut illicit sales. Nevada’s hybrid price-potency tax model may influence others, impacting dispensary accounting and pricing strategies.
Preparing for 2026: Opportunities and Strategies
Federal Reform Readiness
If 280E is repealed or cannabis is rescheduled in 2026, dispensaries must prepare to claim standard deductions. Auditing expense tracking now ensures non-COGS costs (e.g., rent, payroll) are documented for future deductions. Scalable cannabis accounting systems will ease this transition.
State Tax Optimization
As states experiment with lower or restructured taxes, dispensaries should model pricing strategies to stay competitive. For example, dynamic pricing in response to Ohio’s 2026 tax rollout could capture market share. Cannabis accounting experts can help forecast these changes.
Technology and Automation
In 2026, AI-driven compliance tools like Cannalytics will transform dispensary accounting. These platforms integrate predictive tax modeling, helping businesses anticipate rate changes and optimize deductions in real time.
Sustainability and Community Impact
With potential tax relief in 2026, dispensaries can invest in sustainable practices and community initiatives. Eco-friendly cultivation or local partnerships could boost consumer loyalty, especially in maturing markets.
Conclusion
Cannabis accounting and taxes demand strategic planning and expert guidance to navigate federal and state challenges. By maximizing COGS, optimizing business structures, and leveraging technology, dispensaries can thrive. Looking to 2026, federal reform, state tax innovations, and advanced tools promise opportunities for growth.
✍️ By Daniel Sabet, Cannabis CFO & Financial Advisor at @GreenGrowthCPAs. Daniel advises cannabis operators nationwide on finance, compliance, and strategy.
