No ordinary deductions for adult-use sales
Section 280E disallows every deduction and credit except cost of goods sold for a business trafficking in a Schedule I substance.
Industry tax guide
Cannabis businesses tax and accounting
Tax work for a business where the federal rules decide which costs you can deduct at all.
Cannabis operators run licensed, closely regulated businesses that are taxed under federal rules written for illegal drug sales. Cultivators, processors and dispensaries all pay tax on gross profit, so how costs are assigned to inventory matters more than in almost any other industry.
The rules changed in 2026. State-licensed medical cannabis was moved to Schedule III in April 2026, while adult-use cannabis stays in Schedule I. Mixed operators now need to separate the two lines of business carefully.
Compared with a general business
What makes taxes different for cannabis businesses
Two federal schedules at once
Since April 2026, state-licensed medical cannabis is in Schedule III while adult-use remains in Schedule I. Mixed operators need allocations between the two.
Cash-heavy operations
Limited banking means more cash, more Form 8300 reporting and more scrutiny of deposits and cost records.
State excise and gross receipts taxes
Most legal states add cannabis excise taxes and license fees on top of income and sales tax, often at several points in the supply chain.
The rules in detail
Tax rules for cannabis businesses
Section 280E
A business that traffics in a Schedule I or II controlled substance cannot deduct ordinary business expenses or claim credits for that business. Rent, wages, marketing and other selling costs of an adult-use dispensary are nondeductible; only cost of goods sold reduces taxable income.
Medical cannabis moved to Schedule III
A final order published in April 2026 moved FDA-approved marijuana products and state-licensed medical marijuana to Schedule III, which takes those activities outside Section 280E. Adult-use sales remain in Schedule I, so operators that sell both must allocate costs between the two.
Cost of goods sold under Section 471
Cannabis businesses subject to 280E compute inventory costs under the Section 471 rules, not the broader Section 263A rules. Assigning cultivation, processing and production costs to inventory correctly is the main lever left for a 280E business.
Planning moves
Ways to save tax in cannabis businesses
Capitalize every allowable cost into inventory
Cultivation, processing and production costs are assigned under Section 471, so they reduce taxable income through cost of goods sold.
Separate non-plant-touching activities
A properly separate entity for activities that do not handle cannabis can deduct its own ordinary expenses.
Allocate costs to the medical business
Costs that belong to state-licensed medical operations are no longer limited by 280E once the order applies.
Review open years for costing errors
Inventory costing mistakes are the most common reason cannabis businesses overpay; open years can be corrected.
Plan state taxes along the supply chain
Excise taxes and license fees are tracked so each is paid once and recorded in the right cost category.
Choose the entity structure carefully
Entity choice affects how 280E income flows to owners and how losses can be used.
Working with OICPA
How we help
Build an inventory costing method that holds up
Cultivation, extraction and packaging costs captured in inventory with records an IRS examiner can follow.
Business Tax AdvisorySeparate medical and adult-use operations
Revenue, cost and staffing allocations for operators affected by the Schedule III order.
Business Tax PlanningSeed-to-sale records tied to the ledger
Monthly books reconciled to the state tracking system and cash deposits.
Bookkeeping ServicesEntity structure and state filings
Separate entities for licensed and non-plant-touching activities, with the state filings each requires.
Entity Formation & ComplianceBookkeeping and reporting
The accounting behind the tax work
Confirm the current rules with qualified tax and legal specialists, then align the chart of accounts and cost documentation with that analysis.
The operating challenge
Product costing, licensing boundaries, and the applicable tax treatment require careful documentation and current specialist review rather than assumptions drawn from ordinary retail.
The records that matter
License and entity records, inventory movement, production costs, sales records, and cash reconciliations give the review a practical starting point. We identify missing information before recommending changes.
What you can expect
- A prioritized review of the industry-specific accounting issues above
- A tailored reporting and document checklist based on your operating records
- An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination
Frequently asked questions
Does the April 2026 rescheduling end 280E for us?
For state-licensed medical cannabis, yes, starting with the tax year the order applies to. Adult-use operations are still in Schedule I and still subject to 280E. If you sell both, costs have to be allocated between them.
What can a 280E business still deduct?
Cost of goods sold. That makes inventory costing, under Section 471, the most important tax decision for an adult-use operator.
Can we file amended returns for earlier years?
Earlier years remain under the rules that applied then. We review each open year for inventory costing errors, which are the most common source of overpaid tax.
Related articles
References
- 26 U.S. Code § 280E: Expenditures in connection with the illegal sale of drugsLegal Information Institute, Cornell Law School
- 26 U.S. Code § 471: General rule for inventoriesLegal Information Institute, Cornell Law School
- Rescheduling of FDA-approved products containing marijuana from Schedule I to Schedule IIIFederal Register
Rules reflect federal tax law as of November 2026.