Section 280E is probably the biggest line item you can't fully control, and the one most dispensary owners understand least. It's why two stores with identical revenue can take home wildly different profit, and why a dispensary that looks busy and successful can still run out of cash at tax time. Here's what 280E is, why it hits cannabis retailers so hard, the one legal lever that actually moves your bill, and what the 2026 rescheduling news does (and doesn't) change.
(This is educational, not tax advice. Work with a cannabis-experienced CPA.)
What Section 280E Actually Says
Section 280E is a line in the federal tax code dating to 1982. It says a business "trafficking" in a Schedule I or II controlled substance can't deduct ordinary business expenses. Adult-use cannabis is still federally Schedule I, so the IRS applies 280E to state-legal recreational dispensaries, even ones that are fully licensed and perfectly compliant with state law.
In plain terms: rent, payroll, marketing, utilities, software, and most of what you spend to run the store aren't deductible on your federal return. A normal retailer subtracts those costs before paying tax. You can't. The law was written to stop drug dealers from writing off business expenses; it now lands squarely on legal, licensed cannabis retailers.
Why It Hits Dispensaries So Hard
Because most expenses are disallowed, you're taxed close to gross profit instead of net profit. Effective federal rates of 40% to 70% are common, and in a thin-margin year a dispensary can owe federal tax even while posting an operating loss. That's the cruel math of 280E: your tax bill is tied to gross profit, not to what you actually take home.
A simplified picture:
In this example, two businesses with identical economics are taxed on $300K versus $1M. That gap is 280E.
The One Legal Lever: Cost of Goods Sold
Here's the nuance most owners miss. 280E disallows deductions, but COGS isn't a deduction. It's subtracted from revenue to arrive at gross income, so the IRS still allows it. That makes accurate COGS accounting the main legal way to lower a 280E bill.
The catch for retailers is that a dispensary's COGS is narrow. Under the inventory rules (IRC §471), a retailer can generally capitalize the invoice cost of product plus freight and the direct costs of getting it shelf-ready, but not the bulk of store operations. Cultivators and processors can capitalize far more, because more of their activity is "production." So for a retailer, the goal isn't to inflate COGS, since that invites trouble. It's to capture every dollar that legitimately belongs in COGS and document it cleanly enough to defend.
That's an accounting-discipline problem, and it lives or dies on your data:
- Itemized inventory records tied to each purchase and Metrc package.
- Accurate product cost at the SKU level, including freight-in.
- A clean line between cost-of-product and store operating expense, maintained all year.
- Reports your CPA can actually reconcile at year-end.
This is where your POS earns its keep. Meadow tracks inventory cost at the SKU level, reconciles against Metrc, and ships 20+ exportable reports, so handing clean, defensible numbers to your accountant takes minutes, not days.
— Raheem Santos, Inventory Manager, Coast to Coast
What About Entity Structuring?
Some operators separate non-cannabis activities, like a distinct management company or retail-services entity, so those expenses sit outside 280E. Done carefully, this can be legitimate. Done loosely, it draws hard IRS scrutiny, and the case law (notably CHAMP and Harborside) sets real limits on how far you can push it. Treat structuring as a decision for your CPA and attorney.
Will Rescheduling End 280E? What Changed in 2026
This is the development to watch, and the 2026 picture is more nuanced than "280E is over." Here's where it actually stands.
On April 23, 2026, the Department of Justice issued an order (effective April 28) moving two categories of cannabis from Schedule I to Schedule III: state-licensed medical marijuana and FDA-approved cannabis drug products. Because 280E only applies to Schedule I and II substances, the practical effect is real but limited:
- Medical-only operators who, as a result of the order, no longer traffic in a Schedule I or II substance can generally start deducting ordinary business expenses, a major change.
- Adult-use (recreational) cannabis is still Schedule I. 280E still applies in full to recreational sales, which for most multi-state operators is the majority of revenue.
- Dual medical/adult-use dispensaries still traffic in a Schedule I substance through their adult-use line, so 280E continues to apply to that piece. Treasury and the IRS have announced a process for tax guidance on how mixed operators should apportion expenses; until that guidance lands, the allocation method isn't settled.
A separate administrative hearing on whether to reschedule cannabis more broadly, including adult-use, is set to begin June 29, 2026. If that ever extends Schedule III to recreational cannabis, 280E would fall away for adult-use operators too.
Important: rescheduling is moving in stages, and the details affect every operator differently. Until cannabis is rescheduled for your products and the change is in effect, 280E still applies, so plan and reserve for it. Confirm the current status and any new IRS guidance.
What to Do Now
Get these right and you've done everything 280E allows. The rest is your CPA's job.
Common Questions
Does 280E apply to my licensed dispensary?
For adult-use sales, yes: as of the writing of this article recreational cannabis is still federally Schedule I, so 280E applies. State-licensed medical cannabis was moved to Schedule III in April 2026, which can lift 280E for medical-only operators. Confirm your situation with a cannabis CPA.
Can I deduct anything under 280E?
You can subtract cost of goods sold (COGS), because it isn't treated as a deduction. Most operating expenses, like rent, payroll, and marketing, are disallowed for activity that's still Schedule I.
What counts as COGS for a dispensary?
Generally the invoice cost of product plus freight and the direct costs of making it sellable. A retailer's COGS is narrower than a cultivator's under IRC §471. Confirm specifics with a cannabis CPA.
Did the 2026 rescheduling end 280E?
Only partly. State-licensed medical cannabis moved to Schedule III, so 280E can stop applying to medical-only operators. Recreational cannabis is still Schedule I, so 280E still applies to adult-use sales, and dual-license operators must apportion. Verify the current federal status and IRS guidance.
Why do dispensaries owe so much tax?
Because 280E taxes you near gross profit rather than net, your effective rate is far higher than a normal business's, sometimes high enough to owe tax in an unprofitable year.
