Does 280E Still Apply in 2026? Medical vs. Adult-Use Cannabis After Schedule III

Does 280E Still Apply in 2026?

Section 280E denies deductions and credits for amounts paid or incurred in carrying on a trade or business consisting of trafficking in controlled substances within the meaning of Schedule I or Schedule II of the federal Controlled Substances Act. The provision keys off federal scheduling, not state legality and not the medical or non-medical character of the sale.

A proposed rule to move marijuana to Schedule III has been through public comment and administrative proceedings, and as of this writing the reclassification is not a completed, effective change that operators can simply assume into their returns. Until the governing scheduling status for a given tax year is settled and the IRS addresses the tax consequences, filing positions that assume full deductibility carry real risk.

Operators should also resist the assumption that all cannabis activity automatically receives identical federal treatment. A single license holder may run cultivation, processing, retail and non-plant-touching ancillary activity, and the analysis for each can differ. That is an accounting question long before it is a filing question.

• Established: 280E applies to trades or businesses trafficking in Schedule I or II substances
• Established: cost of goods sold reduces gross income and is not a disallowed deduction
• Changed: reclassification to Schedule III has been formally proposed and debated
• Unresolved: effective dates, open-year treatment, method changes and allocation rules
• Unresolved: how mixed activity within one entity would be treated

If you want this reviewed against your own books rather than in the abstract, our 280E accounting and tax compliance service works through inventory, COGS and documentation with your actual records.

Medical vs. Adult-Use Cannabis: Why the Difference Matters for 280E

Section 280E does not contain a medical exception. A dispensing transaction to a qualified patient and a recreational sale in another state are both analyzed through the same statutory language, which is why the medical-versus-adult-use question is really a question about scheduling and about how an operator's activities are grouped, not about the sympathy of the customer.

Florida's situation is distinct from dual-market states. The regulated market here operates through the state's medical use of marijuana program, administered by the Office of Medical Marijuana Use within the Florida Department of Health, and licensed operators are vertically integrated Medical Marijuana Treatment Centers that may cultivate, process, transport and dispense under a single license. Florida does not currently operate an adult-use retail program, so most Florida operators are not running side-by-side medical and adult-use counters today.

The distinction still matters here for three practical reasons. First, several Florida license holders are part of multi-state groups with adult-use operations elsewhere, so consolidated accounting has to keep those activities separable. Second, Florida's market structure has been the subject of repeated adult-use ballot efforts, and a future change would land on whatever accounting system exists at that time. Third, and most immediately, the same discipline that would support a medical-versus-adult-use split is the discipline that already supports cultivation-versus-retail cost segregation inside a vertically integrated MMTC.

The Mixed-Use Cannabis Accounting Problem

Consider a Florida MMTC that cultivates at one site, processes at a second, dispenses at twenty locations, and whose parent group also holds adult-use retail licenses in another state. Suppose federal treatment eventually differs across some of those activities. The tax question then becomes an allocation question, and allocation is answerable only from records that were built to answer it.

Revenue is the easy half. Point-of-sale systems can generally segment revenue by license, location, product category and patient status, and that segmentation should already be flowing into the general ledger by department or class rather than being reconstructed from POS exports at year end.

Costs are the hard half. Direct costs attach cleanly: cultivation labor at a specific site, packaging consumed by a specific production run, product acquired for a specific dispensary. Shared costs do not: corporate payroll, executive compensation, group insurance, enterprise software, security contracts covering multiple sites, accounting and legal fees, and rent on shared administrative space.

There is no IRS-approved allocation methodology for splitting shared costs between differently treated cannabis activities, and it would be irresponsible to present one. What can be said is that any methodology that eventually proves defensible will need a rational driver, contemporaneous support, and consistency — square footage, headcount, direct labor hours, plant counts, unit volume or revenue, chosen because it reflects how the cost is actually consumed, documented before the fact rather than selected after the return is drafted.

• Segment revenue by entity, license, location and activity in the general ledger, not only in the POS
• Separate direct costs by activity at the point of entry
• Identify every shared cost pool explicitly rather than leaving it in a general overhead bucket
• Track payroll by function and site, supported by timekeeping rather than estimates
• Keep inventory, seed-to-sale and accounting records reconciled so allocations start from reliable quantities
• Write the accounting policy down and apply it consistently across periods

Cannabis 280E Expense Allocation and Apportionment

Expense allocation is currently the central 280E accounting discipline — deciding what is properly inventoriable under the applicable inventory rules for a producer versus a reseller. If federal treatment ever diverges across activities within one group, allocation becomes a second, parallel exercise: dividing shared costs among activities rather than only between inventoriable and non-inventoriable.

The cost pools that create the most difficulty are predictable. Rent and occupancy on buildings serving more than one function. Payroll for staff who cross departments. Management and executive compensation. Security, which in a cannabis facility is both a compliance requirement and a shared cost. Utilities, particularly at cultivation sites where consumption is uneven. Software licensed enterprise-wide. Insurance. Professional services. Shared warehouse, delivery and transport capacity.

None of this makes an expense deductible. What documentation does is make an accounting position explainable. A workpaper showing the driver, the measurement, the period, the source data and the person who prepared it is the difference between a position that can be walked through with an examiner and one that cannot.

Allocation workpapers are only as good as the ledger beneath them; see our cannabis bookkeeping service for how the monthly close is structured to produce them.

Chart of Accounts After Schedule III

A chart of accounts built when every dollar of expense below the gross income line was disallowed tends to be blunt, because precision below that line changed nothing. If federal treatment becomes more granular, that bluntness becomes expensive, and rebuilding a chart of accounts retroactively across closed periods is not realistic.

The structural work worth doing now is the work that also improves management reporting today: distinct revenue accounts by activity, inventory and COGS structured by production stage, labor separated by function, overhead pooled deliberately rather than by accident, and a department, class and location dimension that is populated on every transaction rather than on some of them.

For a vertically integrated Florida MMTC this is not speculative preparation. Cultivation, processing and dispensing already require separable cost accounting for inventory purposes, and a chart of accounts that handles that well is most of the way toward handling any future distinction between activities.

• Revenue accounts separated by activity, license and location
• Inventory accounts by stage: raw materials, work in process, finished goods
• COGS accounts that mirror the inventory structure
• Labor accounts split by production, fulfillment and administrative function
• Named shared-overhead pools instead of a single catch-all
• Department, class and location dimensions enforced on every entry
• Standing reconciliations and workpapers tied to each period's close

Inventory and COGS Still Matter

Cost of goods sold reduces gross income rather than functioning as a deduction, which is why it has survived 280E and why inventory accounting has been the discipline that determines cannabis taxable income. A change in scheduling would not make inventory accounting optional. Inventory valuation, capitalization and reconciliation are ordinary requirements of accrual accounting for any business that sells goods, and an examiner reviewing a cannabis return will still test them.

Producers capitalize direct materials, direct labor and defined indirect production costs; a reseller's inventoriable costs are substantially narrower. A vertically integrated license holder applies both frameworks inside one set of books, with internal transfers costed and documented. That work does not go away under any plausible federal outcome — it simply stops being the only lever.

The quantities underneath the valuation have to be right as well. Physical counts, state tracking-system records and the general ledger need to agree, and differences need to be investigated and explained in the period they arise rather than absorbed silently into cost of sales.

Quantity discipline starts with the tracking system; our seed-to-sale reconciliation service covers how operational records are tied back to the ledger each month.

Documentation and Audit Defense

A changing federal tax environment makes clean accounting more important, not less. Periods of transition generate inconsistent positions, amended returns, method changes and comparisons across years, and every one of those is examined against the contemporaneous records that existed at the time.

The record set that matters is unglamorous and specific: point-of-sale detail reconciled to deposits, seed-to-sale tracking reports, physical inventory counts and roll-forwards, purchase invoices and vendor statements, payroll registers with department coding, timekeeping detail, lease and utility documentation, allocation workpapers with stated drivers, written accounting policies, and period-end reconciliations for every balance sheet account.

Records assembled after the fact are recognizable as such. Records produced by a monthly close that already had to be right are not.

• POS reports reconciled to bank deposits and to revenue by activity
• Seed-to-sale reports reconciled to physical counts and to the ledger
• Payroll registers and timekeeping coded by department and site
• Purchase invoices, vendor statements and inventory receipts
• Allocation workpapers stating driver, measurement, period and preparer
• Written accounting policies and methodology memos updated annually
• Balance sheet reconciliations retained with each period's workpapers

What Florida Cannabis Businesses Should Do Now

The preparation that helps under every possible federal outcome is the preparation that is also correct today. None of it requires taking a tax position on an unresolved question, and none of it depends on predicting what Treasury or the IRS will do.

For a Florida MMTC, the practical priority list is shaped by vertical integration. One license holder is running a farm, a factory and a retail chain, and the accounting system either separates those activities cleanly or it does not. If it does, the operation is positioned for whatever comes next. If it does not, that is the work to do first, and it pays for itself in management reporting regardless of federal developments.

Operators that are part of multi-state groups should add one more item: make sure Florida medical activity remains separable from out-of-state adult-use activity in consolidation, with intercompany charges documented and priced on a stated basis.

• Close the books monthly, on a schedule, with reconciliations completed each period
• Separate cultivation, processing and dispensing activity in the ledger, not just in reports
• Reconcile inventory quantities among physical counts, the tracking system and the ledger
• Document how shared costs are measured and allocated, before the period closes
• Code payroll by function and location, supported by timekeeping records
• Preserve source documentation in an organized, retrievable structure
• Keep the chart of accounts capable of finer distinctions than current filings require
• Review positions with your CPA and counsel as federal guidance develops, rather than acting on commentary

For state-level context alongside the federal picture, read the Florida Cannabis Tax Guide and the Florida Cannabis Accounting Guide.

Questions Florida Cannabis Operators Should Ask Their CPA

These questions are useful because the answers are verifiable from the accounting system rather than from opinion. If a question cannot be answered from current records, that gap is itself the finding.

• Does Section 280E currently apply to all of our activity, and how is that conclusion documented?
• Can our accounting system distinguish medical activity from any adult-use activity elsewhere in the group?
• How are shared expenses tracked today, and what driver supports each allocation?
• Is payroll tracked by actual function and site, or estimated at period end?
• Can inventory quantities and COGS be substantiated from source records?
• Do POS, seed-to-sale and accounting records reconcile every month?
• What documentation supports our current inventory capitalization methodology?
• What accounting changes would we need to make if additional federal guidance is issued mid-year?
• Which prior years remain open, and what would a change in treatment mean for them?

If several of those questions do not have an answer today, schedule a consultation and we will start with your current records rather than a sales pitch.

How This Guide Will Be Maintained

This is a developing area of federal tax law. The structure above deliberately separates what is established from what is unresolved so that future Treasury or IRS guidance can be incorporated without rewriting the analysis. Where this guide says something is unresolved, that reflects the position as written and should be re-confirmed with your tax adviser before it informs a filing decision.