Section 280E still shapes cannabis tax planning: what businesses can and cannot do

ARTICLE | October 01, 2026

If you operate a cannabis business, Section 280E has probably shaped your federal tax planning for years.

The rule generally prevents a business from deducting expenses and claiming credits tied to trafficking Schedule I or Schedule II controlled substances. For cannabis companies, that has often meant paying federal tax on an amount much higher than book profit.

That landscape changed in 2026, but not for every cannabis business.

A federal final rule moved FDA-approved marijuana products and marijuana subject to state medical marijuana licenses to Schedule III. The rule also states that qualifying state licensees will no longer be subject to Section 280E, while marijuana outside those categories generally remains in Schedule I. That includes adult-use marijuana, so adult-use operators remain subject to Section 280E. The rule itself cautions that it does not determine any specific taxpayer's federal liability.

So your 280E analysis may now depend on the products you sell, the licenses you hold, and the activities you conduct. If you operate in both medical and adult-use markets, this distinction can affect far more than your tax return. It can change your estimated tax payments, cash flow forecasts, expense classifications, and year-end planning.

Ultimately, you need to know which parts of the business may fall outside 280E before you can plan around the rest.

What Section 280E does to taxable income

The simplest way to understand 280E is to compare book income with taxable income.

Let’s say your dispensary has $2 million of revenue, $1 million of cost of goods sold (COGS), and $700,000 of operating expenses.

Without 280E, a simplified calculation would leave you with $300,000 of business income before other adjustments. However, if the full $700,000 of operating expenses were disallowed under 280E, taxable income could instead be closer to $1 million.

You could therefore show $300,000 of accounting profit while paying federal tax based on a much larger amount. That difference can create a real cash flow problem. A business may look profitable on its financial statements but still struggle to cover its tax payments.

Once you know which activities remain subject to 280E, build that difference into your tax forecast instead of waiting until the return is prepared.

COGS still requires careful classification

Section 280E restricts deductions and credits, but cost of goods sold, or COGS, is treated differently.

That does not mean every expense related to your products belongs in inventory.

For a reseller, COGS can generally include the purchase price of inventory and certain costs necessary to acquire it, such as transportation charges. IRS guidance has distinguished those costs from ordinary business expenses that would otherwise be deductible. Producers may have a different set of inventoriable costs under the tax accounting rules that apply to production.

For example, assume you operate a dispensary and buy finished cannabis products for resale. The amount you pay your supplier may generally be part of inventory cost. Freight needed to get that inventory to your location may also qualify under the applicable rules. Your advertising campaign is different. So is general administrative payroll. Those costs do not become COGS simply because they help you sell inventory.

The details can vary based on whether you are a producer, reseller, or vertically integrated business. Your accounting method also matters.

Review your chart of accounts with those distinctions in mind. If an expense is classified as COGS, you should be able to explain why it belongs there under the applicable inventory rules, not just why the classification produces a better tax result.

A separate business needs more than a separate name

Cannabis businesses often operate more than one line of business. You might sell cannabis, branded apparel, accessories, consulting services, or other products through the same company or through related entities. In some cases, a genuinely separate trade or business may receive different tax treatment.

But the separation has to exist in practice.

Suppose you sell branded T-shirts at the same retail counter where you sell cannabis. The same employees handle the sales, the same managers run the operation, the same lease covers the space, and the same accounting system tracks the activity. Calling the apparel operation a separate business does not automatically make it one for tax purposes.

The same issue comes up with related entities.

Moving an employee's paycheck to another company does not change the work that employee performs. Charging a management fee between related businesses does not automatically convert a disallowed expense into a deductible one. Creating a new legal entity does not guarantee that its activities will be treated as a separate trade or business.

Your records should support what is actually happening.

If employees divide their time between businesses, document it. If businesses share space, support the allocation. If separate operations have their own revenue, employees, management, books, or customers, preserve records that show those differences.

The Treasury has said it expects to address how expenses are apportioned when a business has multiple activities, but that guidance has not been issued. Until it is, document your allocation as if it will be tested. The cleaner the operational separation, the easier it is to support the tax treatment. 

Your state may not follow the federal result

Federal tax treatment is only part of the calculation. States have taken different approaches to Section 280E. Some tie their income tax calculations closely to federal taxable income. Others allow adjustments for cannabis expenses that are disallowed federally.

That can produce very different federal and state taxable income. For example, you may have $500,000 of operating expenses disallowed under 280E for federal purposes, but your state may allow an adjustment for those expenses. 

You also shouldn’t assume that a federal scheduling change automatically produces the same result at the state level.

Review the rules in every state where you file. If you operate in several jurisdictions, include the state differences in your year-end forecast rather than applying one tax treatment across the board.

Broader rescheduling is still something to model, not assume

The 2026 final rule did not move all marijuana to Schedule III.

A separate federal proceeding is considering a broader move from Schedule I to Schedule III. DEA held formal hearings on that proposal in 2026, and that process is separate from the final rule covering FDA-approved products and state-licensed medical marijuana. A recommended decision from the administrative law judge and a final DEA determination are still pending. 

If broader rescheduling eventually takes effect, the impact on 280E could be significant because the statute applies to trafficking in Schedule I and Schedule II controlled substances.

While the exact outcome is uncertain, you can still model it. For example, prepare one forecast using the law that applies to your business today. Then prepare a second showing what taxable income and cash flow could look like if more of your operations later fall outside 280E.

That gives you useful planning information without treating a possible future rule as current law.

Build the tax forecast before year-end

The most useful 280E planning happens before the return is due.

A year-end forecast can separate your business into four areas:

1. Revenue and COGS from activities still subject to 280E.
2. Operating expenses that may be disallowed for those activities.
3. Revenue and expenses from activities that may fall outside 280E.
4. State adjustments that differ from the federal calculation.

Then compare your projected taxable income with your cash on hand, estimated payments already made, and upcoming tax deadlines.

That process can uncover more than a tax problem. You may find that an expense needs better support, that a shared cost needs a clearer allocation, or that your accounting system is not separating medical and adult-use activity well enough for tax planning.

Fixing those issues before year-end is much easier than reconstructing them during return preparation or after an audit begins. If you’d like more personalized guidance, please contact our office. 

This article is for general informational purposes only and is not tax, legal, or accounting advice. Cannabis tax law is changing quickly, and this content reflects developments known as of September 28, 2026. How Section 280E applies to you depends on your facts, licenses, activities, and state law, and federal guidance is still pending. Please consult a qualified tax professional before acting.