280E explained for buyers and sellers

What does section 280E actually say?

Section 280E is a single sentence. It says no deduction or credit is allowed for amounts paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances in Schedule I or II of the Controlled Substances Act, where that trafficking is prohibited by federal law or by the law of the state where the business operates. Congress added it in 1982 after a drug dealer won ordinary business deductions in Tax Court.

Two features decide almost every practical question:

1. It reaches deductions and credits, not cost of goods sold. Cost of goods sold (COGS) is subtracted from gross receipts to arrive at gross income, so it is not a “deduction” in the statutory sense. Rent, payroll for sales staff, marketing, insurance, professional fees, interest and depreciation on non-production assets are deductions, and 280E removes them.
2. It turns on the federal schedule, not state legality. A state license is no defence. The Ninth Circuit confirmed this in Olive v. Commissioner (2015), holding that a state-legal medical dispensary was still a business consisting of trafficking.

Who is still subject to 280E in 2026?

Adult-use operators are. Most medical-only operators are not, going forward.

The order published on 28 April 2026 in the Federal Register placed FDA-approved marijuana products and marijuana subject to a state medical marijuana license in Schedule III. Everything else, including adult-use marijuana, stayed in Schedule I. A DEA hearing on broader rescheduling ran from 29 June to mid-July 2026; as of mid-September 2026 the administrative law judge had not yet issued a recommendation, and the DEA Administrator is not bound by it in any case. The rescheduling status page tracks that process.

Business	280E position as of September 2026
Adult-use retailer, cultivator or manufacturer	Fully subject to 280E
Medical-only licensee operating within its state medical license	Outside 280E for the taxable year that includes the order’s effective date and later years, per the Treasury announcement
Dual medical and adult-use licensee	Must apportion; adult-use share stays under 280E
Ancillary business that never handles marijuana	Generally outside 280E
Hemp business selling federally lawful hemp	Outside 280E, but see the hemp redefinition, which takes effect 11 December 2026 for most of the change and 12 November 2026 for synthetic cannabinoids

What the IRS has and has not said since April 2026

On 23 April 2026 Treasury and the IRS announced that they plan to issue guidance. The announcement previews two points. First, for businesses with more than one activity, 280E will apply only to the activities that still involve Schedule I or II substances, with expenses apportioned between them. Second, a transition rule: rescheduling will generally be treated as first applying for the business’s full taxable year that includes the effective date of the order. For a calendar-year medical operator, that points to the whole of 2026.

As of mid-September 2026 the detailed guidance had not been published. There is no official apportionment method, and the announcement says nothing about earlier years. Buyers should treat any dual-license seller’s 2026 tax position as an estimate until the guidance lands.

How the COGS line is drawn

The size of a 280E bill depends on how much spending can properly sit in COGS. The IRS view, in Chief Counsel memorandum 201504011, is that a cannabis business computes COGS under the section 471 inventory regulations as they existed when 280E was enacted. A retailer capitalises the invoice price of product plus transport and other costs of acquiring it. A producer capitalises direct materials, direct labour and the indirect production costs those regulations allow. The broader section 263A capitalisation rules cannot be used to pull otherwise non-deductible expenses into inventory.

Three cases frame the arguments operators have tried:

• CHAMP (2007). The Tax Court accepted that a taxpayer can run two trades or businesses, and allowed the expenses of a genuine, substantial caregiving business that operated alongside medical marijuana sales.
• Olive (Tax Court 2012, Ninth Circuit 2015). A dispensary that handed out free yoga, snacks and counselling had one business, selling marijuana, because nothing else produced revenue. No second business, no deductions.
• Harborside (Tax Court 2018, Ninth Circuit 2021). A large California dispensary facing more than $29 million in asserted deficiencies lost on every substantive point: 280E applied to the whole business, and section 263A could not be used to expand COGS.

The lesson for a deal: aggressive COGS allocations and “separate business” structures in a seller’s returns are exposure, not value. How the exposure differs for retail, cultivation and manufacturing is covered in 280E by license type.

Worked example: the same store with and without 280E

Illustrative only. A single adult-use retailer, taxed as a C corporation at the 21% federal rate, state tax ignored.

Line	Ordinary business	Under 280E
Revenue	$4,000,000	$4,000,000
Cost of goods sold	$2,200,000	$2,200,000
Gross profit	$1,800,000	$1,800,000
Operating expenses	$1,200,000	$1,200,000 (not deductible)
Pre-tax profit	$600,000	$600,000
Federal taxable income	$600,000	$1,800,000
Federal tax at 21%	$126,000	$378,000
After-tax cash	$474,000	$222,000
Effective rate on pre-tax profit	21%	63%

The store pays an extra $252,000 a year, which is 21% of its $1,200,000 of disallowed expenses. If operating expenses rose to $1,800,000 the business would break even before tax and still owe $378,000. That is how 280E produces tax bills for companies with no profit. You can run your own figures in the 280E effective tax rate calculator.

What 280E means if you are selling

• Your multiple is applied to after-tax reality. Buyers price cash flow after the 280E burden, not book EBITDA. The arithmetic is in how 280E affects valuation.
• Your returns will be read line by line. Expect questions on the COGS method, any second-business position, and whether returns were filed and paid on time. Financial statements that reconcile book income to 280E taxable income save weeks; see cannabis financial statements under 280E.
• Unpaid tax is a closing item. Accrued federal tax, payment plans and liens come out of proceeds or sit behind a holdback. The mechanics are in tax liabilities and holdbacks in a sale.
• Tax on the sale itself is a separate question. Asset versus equity structure, allocation and state tax are covered in taxes when selling a cannabis business.

What 280E means if you are buying

• Model three cases, not one. Current law for the license mix you are buying, a medical-apportioned case if the target holds both license types, and a case where adult-use also moves to Schedule III. Keep them separate; do not pay today for a change that has not happened. The rescheduling tax scenarios page sets out the table.
• Structure decides what you inherit. Buying equity means buying the entity’s open tax years. Buying assets generally leaves federal income tax with the seller, though liens and state successor rules still need clearing.
• Check the state return too. Many states let licensees deduct ordinary expenses on the state return even while federal 280E applies. The list is in state 280E decoupling.
• Ask for the uncertain-position file. If the seller filed returns claiming 280E does not apply, or filed refund claims, get the legal opinion, the amounts, and the statute-of-limitations dates. The IRS said in June 2024 that such refund claims “are not valid”.

This page is general education, not tax advice. 280E positions should be reviewed by a CPA or tax attorney who works with cannabis returns. If you want to talk through how the tax picture affects a sale or acquisition, you can book a confidential intro call.