Tax Court’s Section 199A Ruling Deals Another Blow to Cannabis Operators

By Jay Kotzker, Chief Legal Officer | September 2025

The U.S. Tax Court has once again underscored the unique tax burdens facing cannabis operators. In a recent 17–1 decision, the full court held that cannabis businesses cannot claim the Section 199A qualified business income (QBI) deduction for wages paid, because those wages are not deductible under Internal Revenue Code Section 280E.  The ruling, which resulted in nearly $1 million in additional tax liability for the co-owners of two Washington state dispensaries, marks a significant precedent for cannabis operators nationwide.

The Court’s Reasoning

At the heart of the case was whether wages paid by cannabis companies could count as “W-2 wages” for purposes of the QBI deduction, created under the 2017 Tax Cuts and Jobs Act. Judge Emin Toro, writing for the majority, explained that Section 199A only allows deductions to the extent the expenses are “allowed in determining taxable income.” Because Section 280E prohibits deductions for businesses that traffic in federally controlled substances, the court concluded that cannabis operators’ wages fall outside the scope of QBI.  In short: if wages are nondeductible under Section 280E, they cannot generate a 199A deduction

A Dissenting View

Judge Rose E. Jenkins dissented, arguing that Section 199A should be read independently of Section 280E. She noted that Congress did not explicitly exclude cannabis businesses from Section 199A, and that allowing the deduction would align with the statute’s broader purpose of encouraging job creation.

Practical Impact on Cannabis Operators

This decision has wide-ranging consequences:

• Further erosion of tax relief – Cannabis operators already cannot deduct ordinary business expenses under 280E. The inability to claim the Section 199A deduction removes one of the few potential avenues of tax relief.
• Increased effective tax rates – By denying the QBI deduction, cannabis operators face even higher effective tax burdens compared to non-cannabis businesses. This widens the gap between state-legal cannabis companies and mainstream industries.
• Investor and growth challenges – Higher after-tax costs reduce available capital for reinvestment, expansion, and employee wages. This may chill investment interest in an industry already struggling with tight margins.
• Regulatory uncertainty persists – The decision highlights the patchwork created by federal illegality. Even when Congress designs generally applicable tax incentives, cannabis businesses are often excluded unless explicitly written in.

What Operators Should Do Now

• Reevaluate tax strategies – Cannabis operators should consult with tax professionals to reassess exposure, especially if they previously attempted to claim QBI deductions.
• Track potential appeals – Counsel for the taxpayers indicated they may appeal the ruling. A reversal could open the door for deductions, but operators should remain cautious.
• Advocate for legislative reform – This decision underscores the urgency of reforming Section 280E or carving out cannabis businesses from its reach. Until Congress acts, federal tax courts are unlikely to offer relief.

Bottom Line

The Tax Court’s ruling in Savage v. Commissioner and Torres v. Commissioner is another reminder that cannabis operators remain boxed out of many federal tax benefits. Unless and until Congress changes the law, cannabis businesses will continue to face significantly higher tax burdens, hampering their competitiveness and long-term growth.