How 280E affects valuation

What 280E does to the income statement

Section 280E denies every deduction and credit to a business that traffics in a Schedule I or II controlled substance. Cost of goods sold is not a deduction in the technical sense, so it still reduces gross receipts. Everything below gross profit is ignored for federal tax: rent, retail payroll, security, marketing, insurance, professional fees, interest.

Adult-use marijuana is still Schedule I, so adult-use operators remain under 280E. On 28 April 2026, Federal Register 2026-08176 placed marijuana subject to a state medical marijuana license in Schedule III. Treasury said the same week that for activities no longer involving Schedule I or II substances, the change will first apply for the full taxable year that includes the order’s effective date, and that coming guidance will address apportioning expenses for businesses with both kinds of activity.

The mechanics of the statute are covered on the 280E explainer. This page is about price.

Worked example: EBITDA to after-tax cash

Illustrative. One dispensary, C corporation, 21% federal rate, state tax ignored, no debt, depreciation ignored to keep the arithmetic visible.

Line	Amount
Revenue	$5,000,000
Cost of goods sold (55%)	$2,750,000
Gross profit	$2,250,000
Operating expenses (rent, payroll, security, marketing, G&A)	$1,500,000
EBITDA	$750,000

Case A: adult-use under 280E. Taxable income equals gross profit, $2,250,000. Federal tax is 21% of that, $472,500. After-tax cash is $750,000 minus $472,500, which is $277,500. The effective rate on real pre-tax profit is 63%.

Case B: state-licensed medical, Schedule III. Operating expenses are deductible. Taxable income is $750,000. Federal tax is $157,500. After-tax cash is $592,500. Effective rate 21%.

Case C: dual license, 40% medical and 60% adult-use by revenue. Assume, for illustration only, that expenses are apportioned by revenue. Deductible expenses are 40% of $1,500,000, or $600,000. Taxable income is $2,250,000 minus $600,000, or $1,650,000. Tax is $346,500. After-tax cash is $403,500. The actual apportionment method depends on IRS guidance that Treasury has announced but, as of its April 2026 release, not yet issued. Baker Tilly notes that apportionment is the critical open question for operators with both medical and adult-use divisions.

Same store, same EBITDA, three very different cash results: $277,500, $403,500, $592,500.

How the tax difference flows into price

A buyer services acquisition debt and earns a return from after-tax cash, not from EBITDA. Suppose a buyer would pay 4.0x EBITDA, or $3,000,000, for the Case B store. That is about 5.06x its $592,500 of after-tax cash.

Apply the same 5.06x after-tax yardstick to the other cases:

Case	After-tax cash	Value at 5.06x after-tax cash	Equivalent EBITDA multiple
A: adult-use, 280E	$277,500	$1,405,000	1.9x
C: 40% medical	$403,500	$2,043,000	2.7x
B: medical, Schedule III	$592,500	$3,000,000	4.0x

Real negotiations are not this mechanical. Buyers give some credit for the possibility that adult-use is rescheduled later, and sellers in scarce-license markets have leverage that overrides the tax math. But the direction is reliable: 280E is the main reason a cannabis EBITDA multiple looks low against mainstream retail. Public markets show the same thing. Viridian Capital’s November 2025 report put the median larger MSO at 5.1x forward EBITDA, and its adjusted measure adds excess tax liabilities to enterprise value precisely because unpaid 280E tax behaves like debt.

Why license type changes the damage

The share of spending that lands in cost of goods sold decides how hard 280E bites.

Illustrative cultivator with the same $5,000,000 of revenue and $750,000 of EBITDA, but cost of goods sold at 65% because grow labor, utilities, nutrients, and facility costs are inventoriable: gross profit is $1,750,000, tax under 280E is $367,500, and after-tax cash is $382,500. The effective rate is 49%, against 63% for the retailer. Manufacturers usually fall between the two. The sibling page on 280E by license type goes through each category.

Pushing costs into inventory to shrink the 280E bill is a known audit issue. A buyer’s accountant will test whether the seller’s cost allocation would survive examination. If it would not, the buyer reprices using a more conservative allocation.

Legacy 280E liabilities reduce price dollar for dollar

Many operators filed returns taking positions that 280E does not apply, or simply did not pay. The scale is visible in public filings: Trulieve reported $668.4 million of uncertain tax position liabilities on its balance sheet at 31 December 2025. Treasury’s April 2026 announcement describes a transition rule for the year of the order and does not promise relief for earlier years.

For a private sale this means:

1. In an equity sale, unpaid or contested federal tax stays with the company. Expect the buyer to subtract its estimate, plus penalties and interest, from the price.
2. In an asset sale, the buyer still worries about successor liability and liens, so tax holdbacks are standard.
3. Sellers who filed conservatively and paid in full should say so early. Clean tax history is a genuine premium in this industry.

Presenting the numbers so buyers do not over-discount

A broker will typically ask a seller for four figures, shown separately and never blended: normalized EBITDA, federal tax as filed under 280E, after-tax cash, and, where part of the business is state-licensed medical, a pro forma showing tax on that portion under the April 2026 order. The guide to cannabis financial statements under 280E explains the layout, and the 280E effective tax rate calculator lets you run your own figures.

What happens to value if adult-use is rescheduled as well is a separate question, covered on the page about how rescheduling would affect valuation. This page is educational and is not tax advice; the examples are simplified and ignore state income tax, depreciation, and entity-level differences.