Minnesota’s cannabis industry is officially taking root, but if you’re a business owner in this space, tax season may already feel overwhelming. Between evolving state regulations and the burdens of federal tax codes like Section 280E, cannabis entrepreneurs face serious financial risks if they’re not careful.
This guide will walk you through the most common cannabis tax pitfalls in Minnesota—and how to avoid them—so you can stay compliant, maximize your deductions, and keep your business thriving. Let’s break down what you need to know.
Understanding Minnesota Cannabis Taxes in 2025
Minnesota legalized adult-use cannabis in 2023, with retail sales expected to grow significantly through 2025 and beyond. With this growth comes increasing scrutiny from the Minnesota Department of Revenue and the IRS. Key elements of cannabis taxation in the state include:
- State Cannabis Excise Tax: 10% on retail sales of cannabis products.
- Local Sales Tax: Varies by municipality and is added on top of the state excise tax.
- Federal Income Tax Compliance (280E): Cannabis businesses remain federally illegal, and thus, cannot deduct normal business expenses beyond cost of goods sold (COGS).
That means your margins can shrink fast if you’re not strategically managing tax exposure.
Common Cannabis Tax Pitfalls in Minnesota
1. Misunderstanding 280E Limitations
Section 280E of the IRS tax code disallows most standard business deductions for cannabis companies because cannabis remains a Schedule I controlled substance. Many operators mistakenly assume they can deduct marketing, rent, payroll, or software costs—when in reality, they can only deduct COGS.
What You Can Do:
- Work with a cannabis-savvy CPA to properly classify COGS.
- Use cost segregation and entity structuring to optimize what’s deductible.
2. Poor Recordkeeping Practices
Accurate, timely, and cannabis-compliant bookkeeping is not optional—it’s mandatory. Sloppy accounting can trigger audits and result in substantial penalties or back taxes.
Best Practices:
- Use cannabis-specific accounting software that integrates with METRC.
- Maintain detailed logs of inventory, sales, employee time, and tax payments.
- Reconcile your books monthly (not quarterly or yearly).
3. Failing to Prepare for Minnesota’s Quarterly Filings
Cannabis retailers in Minnesota must file excise tax returns on a quarterly basis. Missing a deadline or filing incorrect data could lead to fines or even license suspension.
Avoid This By:
- Setting calendar reminders for quarterly deadlines.
- Automating filings through a tax professional familiar with cannabis reporting.
- Reviewing state guidelines regularly as updates may change filing frequency or forms.
4. Overpaying or Underpaying Taxes
Because of the complexity of calculating COGS and layering multiple taxes (excise, sales, income), it’s easy to either overpay—hurting your cash flow—or underpay—leading to interest and penalties.
Solution:
- Implement quarterly tax planning with a cannabis CFO or CPA.
- Regularly review your effective tax rate and adjust forecasts accordingly.
5. Inadequate Entity Structuring
Some cannabis business owners operate under a single entity when creating separate legal entities (e.g., one for real estate, one for operations) could yield substantial tax savings and protect assets.
Tax-Smart Structuring Tips:
- Consider forming an S-Corp or LLC for ancillary services like management or property leasing.
- Structure to legally separate deductible and non-deductible activities under 280E.
How to Build a Cannabis Tax Strategy in Minnesota
To minimize tax liabilities and boost profitability, Minnesota cannabis companies need a tax strategy—not just tax prep. Here’s how to build one:
Hire a Specialized Cannabis CPA
Generic accountants may not understand the nuances of 280E or the complexities of cannabis excise tax in Minnesota. Partner with CPAs who specialize in cannabis to:
- Navigate federal and state compliance
- Maximize COGS within legal boundaries
- Identify hidden tax-saving opportunities
- Stay audit-ready year-round
Conduct Quarterly Tax Reviews
Don’t wait for year-end to assess your tax situation. By reviewing financials quarterly, you can:
- Adjust your financial forecast based on current liabilities
- Make real-time decisions on expenses and expansion
- Prepare documentation for any potential audit or compliance issue
Consider Cannabis CFO Services
Outsourced CFO services give cannabis businesses the financial leadership they need—without the cost of a full-time executive. Services can include:
- Cash flow forecasting
- Budgeting and financial modeling
- KPI development and performance tracking
Minnesota Cannabis Tax FAQs
What is the cannabis excise tax rate in Minnesota?
As of 2025, Minnesota imposes a 10% excise tax on retail cannabis sales, in addition to applicable state and local sales taxes.
Can cannabis businesses in Minnesota deduct business expenses?
Only COGS (Cost of Goods Sold) is deductible under Section 280E. Expenses like marketing, rent, and payroll are not deductible on federal taxes.
Do I need a cannabis-specific CPA?
Yes. Cannabis accounting and tax planning require specialized knowledge. A general CPA may overlook compliance rules or tax-saving opportunities unique to the industry.
How often do I need to file cannabis taxes in Minnesota?
Retailers must file excise tax returns quarterly. Make sure to check for any updates to filing frequency or reporting requirements with the Minnesota Department of Revenue.
What happens if I miss a tax filing?
Missed filings can result in penalties, interest, or license suspension. It’s critical to stay ahead of all deadlines and ensure accurate documentation.
Final Takeaways: Avoid Pitfalls, Protect Profits
Minnesota’s cannabis industry holds massive potential, but only for those who stay financially sound and compliant. Don’t let tax missteps drain your bottom line. From understanding 280E to optimizing your filing schedule and entity structure, it pays to work with experts who know the terrain.
GreenGrowth CPAs helps cannabis businesses in Minnesota and nationwide build strong, scalable financial foundations. We’ve guided hundreds of clients through audits, filings, and strategic tax planning tailored to the cannabis sector.
📢 Need expert tax guidance for your cannabis business? Schedule a free consultation with GreenGrowth CPAs today and maximize your savings.
