For both sides
280E effective tax rate calculator
Federal and state law current as of September 2026 — verify with counsel.
The 280E effective tax rate calculator estimates federal income tax for a cannabis business by splitting results between adult-use and medical sales. The adult-use share is taxed on gross profit, because section 280E disallows operating expense deductions. The medical share is taxed on profit after its share of SG&A. The tool then shows the tax as an effective rate on true pre-tax income.
Key takeaways
- Formula: taxable income = (revenue - COGS) x adult-use share + the larger of zero and (revenue - COGS - SG&A) x medical share; tax = taxable income x rate.
- With the defaults ($2 million revenue, $900,000 COGS, $700,000 SG&A, 40% medical, 21% rate) the tool shows $172,200 of tax on $820,000 of blended taxable income.
- That is an effective rate of about 43% on $400,000 of real pre-tax profit; the same business with no medical sales would pay $231,000, about 58%.
- Section 280E still applies to adult-use marijuana, which remained in Schedule I as of September 2026; qualifying state-licensed medical activity moved to Schedule III under the April 2026 order.
- The IRS had not published detailed apportionment guidance for dual operators as of mid-September 2026, so the revenue-share split in the tool is an assumption.
What the 280E calculator computes
The tool estimates federal income tax for a plant-touching business that may have both adult-use and medical sales. Section 280E denies all deductions and credits to a business trafficking in Schedule I or II substances. Cost of goods sold survives because it reduces gross income and is not a deduction. The result is that an adult-use operator pays tax on gross profit, not net profit. The law itself is explained on 280E explained for buyers and sellers.
Since the April 2026 order, marijuana subject to a state medical license is in Schedule III, so qualifying medical activity deducts expenses normally. Adult-use remains in Schedule I. The calculator blends the two.
The formula
- Adult-use share = 1 - medical share
- Adult-use taxable income = (revenue - COGS) x adult-use share
- Medical taxable income = (revenue x medical share) - (COGS x medical share) - (SG&A x medical share), floored at zero
- Blended taxable income = step 2 + step 3
- Federal tax = blended taxable income x rate
- True pre-tax income = revenue - COGS - SG&A
- Effective rate = federal tax / true pre-tax income
The output line shows the tax, the blended taxable income, true pre-tax income, and the effective rate to one decimal place. If true pre-tax income is zero or negative, the rate is shown as n/a.
Inputs
| Input | What to enter |
|---|---|
| Revenue | Annual net revenue, all sales |
| COGS | Inventory cost allowed for tax, not management-accounts COGS. The IRS position on what a 280E taxpayer may capitalise is in Chief Counsel memorandum 201504011. The Ninth Circuit rejected a dispensary’s attempt to use the broader section 263A rules in Harborside in April 2021. |
| SG&A | Operating expenses that are not in COGS: store payroll, rent, marketing, administration |
| Medical share | A decimal from 0 to 1. Use the share of revenue from sales made under a state medical license |
| Ordinary tax rate | A decimal. The default 0.21 is the federal corporate rate. Pass-through owners should enter their own marginal rate |
Worked example
Illustrative, using the tool’s defaults: revenue $2,000,000, COGS $900,000, SG&A $700,000, medical share 0.4, rate 0.21.
| Line | Adult-use (60%) | Medical (40%) | Total |
|---|---|---|---|
| Revenue | $1,200,000 | $800,000 | $2,000,000 |
| COGS | ($540,000) | ($360,000) | ($900,000) |
| Gross profit | $660,000 | $440,000 | $1,100,000 |
| SG&A deducted | $0 | ($280,000) | ($280,000) |
| Taxable income | $660,000 | $160,000 | $820,000 |
| Federal tax at 21% | $138,600 | $33,600 | $172,200 |
True pre-tax profit is $2,000,000 - $900,000 - $700,000 = $400,000.
| Scenario | Federal tax | Effective rate on $400,000 |
|---|---|---|
| No 280E at all | $84,000 | 21% |
| Default: 40% medical | $172,200 | About 43% |
| 100% adult-use (medical share 0) | $231,000 | About 58% |
The difference between the last two rows, $58,800 a year, is the value of the medical mix in this example. It equals the deductible SG&A of $280,000 times 21%.
How to use the result in a deal
- Sellers: a buyer values after-tax cash flow. If your effective rate is 58%, a 5x EBITDA headline is a much higher multiple of the cash the buyer keeps. See how 280E affects valuation.
- Buyers: rebuild the seller’s tax from the filed returns, not the income statement, and check that tax actually paid matches. Unpaid 280E tax is a common source of liens; see tax liabilities and holdbacks in a sale.
- Both: exposure differs by license type because COGS is a larger share of cost for growers and processors than for retailers, as shown on 280E by license type.
Limitations
- Apportionment is an assumption. The tool splits COGS and SG&A by revenue share. Treasury previewed transition and apportionment rules on 23 April 2026, but no detailed IRS guidance had issued as of mid-September 2026. The final method could differ.
- No state tax. States differ on whether they follow 280E; see state 280E decoupling.
- No depreciation, interest, or credits. These are disallowed for the adult-use share like any other deduction, but the tool does not model them separately. Include them in SG&A for a rough answer.
- No loss carryovers, penalties, or interest on unpaid balances.
- Medical losses are floored at zero. A loss on the medical side does not offset adult-use gross profit in the tool.
To see what would change if adult-use were also rescheduled, use the rescheduling impact calculator. This page and the tool are educational and are not tax advice; a cannabis-experienced CPA should prepare any figure you rely on.
Illustrative result will appear here.
Illustrative only. Defaults are commentary ranges, not a valuation or tax opinion. Federal and state law current as of September 2026.
Frequently asked questions
How does the calculator work out the effective tax rate?
It divides the federal tax by true pre-tax income, which is revenue minus cost of goods sold minus SG&A. With the default inputs, $172,200 divided by $400,000 is about 43%. If pre-tax income is zero or negative the tool shows n/a, which is itself the point: 280E can create tax on a business with no profit.
What should I put in COGS for a 280E calculation?
Only costs that tax law allows in inventory cost. For a retailer that is mainly the invoice price of product plus transportation and other necessary acquisition charges. Growers and manufacturers can include direct materials, direct labour, and allocable production overhead. Marketing, most store payroll, and general administration are not COGS. Aggressive COGS allocations are a common audit issue, so use the figure from your filed return.
Why does the medical share get to deduct SG&A?
The April 2026 federal order placed marijuana subject to a state medical license in Schedule III. Section 280E only covers Schedule I and II substances, so qualifying medical activity is outside it going forward and ordinary business deductions apply. Adult-use marijuana stayed in Schedule I. A business with both kinds of sales must apportion its expenses.
Does the calculator include state income tax?
No. It computes one federal layer at the rate you enter. Many states have decoupled from 280E and allow normal deductions on the state return, while a few still follow it. Add your state tax separately. You can approximate a combined rate by raising the rate input, but that overstates tax in a decoupled state.
My business is an LLC taxed as a partnership. Is 21% the right rate?
Probably not. The 21% default is the federal corporate rate. In a partnership or S corporation the 280E-inflated income flows to the owners and is taxed at their individual rates, which can be higher. Enter the owners' expected marginal rate as a decimal to see the effect. The rules for the pass-through deduction are outside the tool.
Sources
- Legal Information Institute — 26 U.S.C. 280E — https://www.law.cornell.edu/uscode/text/26/280E
- Federal Register — Schedules of Controlled Substances, 2026-08176 (28 April 2026) — https://www.federalregister.gov/d/2026-08176
- U.S. Department of the Treasury — Treasury, IRS announce process for tax guidance following DOJ final order, press release sb0471 (23 April 2026) — https://home.treasury.gov/news/press-releases/sb0471
- IRS Office of Chief Counsel — Memorandum 201504011, capitalization of inventoriable costs (January 2015) — https://www.irs.gov/pub/irs-wd/201504011.pdf
- U.S. Court of Appeals, Ninth Circuit — Patients Mutual Assistance Collective Corp. v. Commissioner, No. 19-73078 (22 April 2021) — https://law.justia.com/cases/federal/appellate-courts/ca9/19-73078/19-73078-2021-04-22.html