Moving forward: A roadmap for Minnesota cannabis CPAs
Mark R. Waller, CPA | August/September 2026 Footnote
Editor's note: Updated July 27, 2026
Operating in the legal cannabis industry is complicated. One year of operating in the space can feel like several due to rule changes, fluctuating economics and the fast pace in which the space operates. While this can feel exciting, cannabis operators must also be incredibly disciplined, focused and steady in setting up a new business in a brand-new industry.
Minnesota passed its adult-use cannabis bill in 2023 and now, in 2026, we are finally beginning to see businesses open. The excitement and buzz surrounding this brand-new legal industry is palpable. Operators in this space desperately need strong accountants to guide them through this phase to ensure sizable capital expenditures (often paid out-of-pocket) are accounted for properly before they open. And, once they open, operators face a dizzying array of rules, regulations, taxes and competition.
CPAs working alongside cannabis operators should be aware of the many complexities involved in the industry. Federal tax complexity and state compliance lead the way in topics that Minnesota-based CPAs should consider when working with their clients.
Section 280E: A challenging tax hurdle
For starters, CPAs must be aware that cannabis businesses are subject to Section 280E of the Internal Revenue Code. Section 280E states:
“No deductions or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any State in which such trade or business is conducted.”
Because cannabis has traditionally been classified as a Schedule I controlled substance, cannabis operators have been unable to deduct ordinary operating expenses aside from cost of goods sold. Some practitioners have used more aggressive tax positions, using alternative inventory methods that may allow cannabis operators to move more cost to cost of goods sold. Generally speaking, cannabis operators have operated in a Section 280E environment that has resulted in effective federal tax rates closer to 80-90% of net income, as taxable income rates must be applied to gross margin rather than net income. Without meticulous planning, those large liabilities can easily sink a cannabis operation very quickly.
That said, on April 28, 2026, the federal Drug Enforcement Administration (DEA) announced a final rule, which reschedules FDA-approved drug products and products subject to a state-issued medical cannabis license from Schedule I to Schedule III. Though the IRS has yet to issue guidance acknowledging this change, nor does the change definitively determine any changes to federal tax liabilities, the final rule means that FDA-approved cannabis products are now considered Schedule III controlled substances, which make them no longer subject to Section 280E.
Importantly, FDA-approved cannabis products only cover a fraction of the total addressable market of cannabis products and adult-use products remain Schedule I. Importantly, as of 2025, adult-use sales still make up nearly 76% of all total sales, meaning only a quarter of the total addressable market is currently affected by the final rule.
On June 29, 2026, the DEA began hearings intended to address the recreational cannabis market. It remains to be seen whether those hearings will result in a similar conclusion, or whether the adult-use legal cannabis sector will remain subject to Section 280E. As such, there is no guaranteed outcome or timeline for a final ruling, so cannabis operators should not assume imminent relief.
Minnesota rulemaking and governance: An evolving landscape
Following the passage of the cannabis law Chapter 342, the state of Minnesota created a new state office — the Office of Cannabis Management (OCM). Subsequently, the OCM has since developed the operational and regulatory systems to oversee the adult-use cannabis industry. The law created unified licensing framework, which covers all types of businesses in the cannabis industry, including cultivators, manufacturers, retailers, microbusinesses, mezzobusinesses, transporters and testing facilities.
Notably, the existing medical cannabis program transitioned into the same framework as well and no longer operates as a separate vertical. Additionally, the law provided a dedicated licensing track for social equity applicants with grant and loan programs intended to support communities impacted by cannabis prohibition and the war on drugs.
In the 2026 Minnesota legislative session, some updates were made to the law. The most notable changes include, but are not limited to:
- The establishment of a unified supply chain, meaning adult-use and medical cannabis no longer require separate supply chains from cultivation through manufacturing.
- A new license type called Macrobusiness, which allows for 38,000-45,000 square feet of canopy and up to eight retail locations, capped at eight total statewide licenses.
- Medical endorsements added for business growth, which allow license holders to add medical cultivation, manufacturing or retail endorsements to earn more canopy space, higher production limits and additional retail locations. This may also be an area where businesses can plan for more medical sales, which could result in lower tax burdens due to the rescheduling of medical cannabis. No longer requiring a new license when business structure changes are made.
Importantly, Minnesota CPAs should know that Minnesota does not conform to Section 280E, meaning that all deductions are allowable for state income tax returns. Cannabis and hemp businesses must be licensed with the OCM to qualify for these deductions.
Cannabis products are also subject to a 15% gross receipts tax on all cannabis and hemp products (an increase from the original 10% gross receipts tax originally established by law), on top of the 6.875% general state sales tax and any applicable local sales taxes. Minnesota accountants should know that operators are responsible for ensuring that those taxes are collected on sales of products and that operators are current with the filing of sales tax returns with the Minnesota Department of Revenue.
The hemp product wrinkle
Minnesota is known nationally for its robust cannabis beverage and edible market. Signed on June 2, 2022, and effective July 1, 2022, under HF 4065, the law that effectively created the market as-is meant many Minnesota businesses quickly took advantage of the ability to manufacture any edible or drinkable product legally derived from federally legal hemp. Federally legal hemp was established in 2018 under the Farm bill. Essentially, it created a gray zone of federally compliant, non-Schedule I hemp-derived cannabis products. Chapter 342 began the process of closing those loopholes by bringing hemp-derived products under OCM’s regulatory authority.
As of today, because hemp-derived products are federally legal, they are not subject to Section 280E. However, another federal bill that passed Nov. 12, 2025, and will become effective Nov. 12, 2026, may deal a hard blow to the hemp-derived cannabis industry as a whole. The ban would cap total potency of THC products to less than or equal to 0.4 mg total THC per package, which would effectively kill any products currently on the market, which typically measure at least 5 mg total THC per product (for example, most cannabis beverages are marketed as 5 mg per serving.)
Accountants should be aware that these changes may be coming later this year, pending any potential last-minute changes.
The bottom line
The legal cannabis industry in Minnesota stands at an inflection point. The DEA hearing on adult-use rescheduling on June 29, 2026, the Nov. 12, 2026, hemp potency cap and the OCM’s ongoing regulatory buildout create a compressed timeline for strategic action.
CPAs should now position their cannabis operator clients to:
- Prepare for the Section 280E variable. Model both scenarios for adult-use clients — one where Section 280E persists (the default case), one where June 29 rescheduling eliminates it (the upside case). Document the assumptions clearly. If your client qualifies for medical licensing or medical endorsements, evaluate the blended Section 280E impact across that portion of the business. A 10-15 percentage point swing in effective tax rate should inform capital and operational planning today.
- Audit hemp supply chains before Nov. 12, 2026. If clients carry low potency hemp-derived cannabis inventory, the 0.4 mg cap is an imminent threat. Current products are noncompliant under federal law after that date. Clients need CPAs to flag this now so they can liquidate responsibly, pivot to in-scope products or exit the segment before the cliff. This is a cash flow and compliance issue, not just a tax one.
- Capitalize on the medical licensing advantage. The rescheduling of state-licensed medical products to Schedule III, combined with medical endorsements and the unified supply chain, creates a tax-planning lever that adult-use-only operators don’t have. Clients with medical licensing pathways should evaluate whether a blended medical and adult-use operation reduces federal and state tax burden versus pure adult-use.
- Ensure compliance discipline from day one. The 15% gross receipts tax, the 6.875% state sales tax and the OCM licensing requirement are not negotiable. Strong accounting systems, accurate revenue tracking, and timely filing are the difference between sustainable operations and regulatory sanction. CPAs who help new operators avoid these missteps in the first year protect their clients from compounded penalties and reputational damage.
The cannabis industry will not slow down for accountants to catch up. Those who build expertise now, on Section 280E variables, hemp transition mechanics, medical versus adult-use economics and OCM compliance, will become indispensable to the operators navigating the foreseeable future.
Mark Waller, CPA is the director of client accounting services for SAX Advisory Group.
