IRS Confirms Marijuana Budtenders Remain Ineligible for Tip Tax Deductions Until Federal Legalization

The Internal Revenue Service (IRS) clarified this week that employees in the state-legal cannabis industry, including budtenders, are not currently eligible to claim tax deductions on tips received at work under the federal “No Tax on Tips” law. This policy, signed into law by President Donald Trump in 2023, allows certain tipped workers to deduct qualified gratuities from their taxable income. However, the IRS’s final rule, published in the Federal Register, confirms that as long as marijuana remains federally illegal, cannabis industry workers do not qualify for this benefit

The IRS addressed public comments regarding the exclusion of cannabis workers from the new policy, noting the unique regulatory situation of state-legal marijuana businesses. According to the agency, “qualified tips” must be earned in an occupation that is legal under both federal and state law. “Tips received by these workers must be received in an occupation that is included on the List of Occupations that Receive Tips and must not be received for a service the performance of which is a felony or misdemeanor under applicable law, including under Federal law, to be qualified tips eligible for the deduction under section 224,” the IRS stated in response to concerns

Budtenders, who often receive gratuities from customers similarly to bartenders or baristas, are affected by this federal stance despite operating in states where cannabis sales are legal and regulated. The IRS emphasized that if federal law changes to legalize marijuana transactions, these workers could become eligible for tip deductions as long as all other requirements are met. “If Federal law changes, making certain marijuana-related transactions legal, and those same transactions are legal under State law, then tip amounts received in such transactions may be qualified tips if all other requirements for qualified tips are met,” the agency explained

Beyond the issue of tip deductions, the IRS reiterated its position on Section 280E of the tax code, which prohibits state-legal marijuana businesses from taking most federal tax deductions. The agency recently told the U.S. Tax Court that the rescheduling of marijuana would not automatically exempt these businesses from 280E until federal law is formally changed. Legal challenges, such as the one initiated by New Mexico’s Ultra Health, have so far failed to overturn this interpretation, with the Congressional Research Service reporting that courts have consistently upheld the statute

The ongoing tax challenges for the cannabis sector have prompted some businesses to seek creative accounting solutions, though the IRS has warned against filing supplementary forms without a reasonable basis to claim deductions precluded by 280E. Any resolution to these tax hurdles will likely depend on federal action, particularly the potential rescheduling of cannabis from Schedule I to Schedule III, as directed by an executive order issued late last year. However, progress on this front has stalled, leaving the industry in a state of uncertainty

From the OG Lab newsroom perspective, these IRS clarifications underscore the persistent disconnect between state cannabis laws and federal tax policy. Until Congress or federal agencies enact comprehensive reforms, cannabis businesses and their employees will remain excluded from tax benefits available to other legal industries. Industry stakeholders should closely monitor federal rescheduling efforts and tax code updates, as any shift could have significant ramifications for profitability and worker compensation