The short version
- State-licensed medical cannabis is now Schedule III. An order signed April 22, 2026 (effective April 28, 2026) moved state-licensed medical cannabis and FDA-approved cannabis products to Schedule III.
- 280E generally no longer applies to medical activity. Section 280E only reaches Schedule I and II substances.
- Adult-use is unchanged. Recreational cannabis is still Schedule I and still fully subject to 280E.
- Full rescheduling is still pending. The broader DEA hearing started June 29, 2026, was paused September 29, 2026 and had not resumed as of mid-October 2026.
- If you hold both licenses, the split matters. How you allocate shared costs between medical and adult-use may now be one of the most important numbers on your return.
Heads up: this page is general information, current as of mid-October 2026. Rules and guidance are moving. It isn't legal or tax advice for your specific situation, so talk to us (or your own advisor) before acting on it.
Timeline
The Acting Attorney General signs an order moving state-licensed medical cannabis and FDA-approved cannabis products to Schedule III.
The order takes effect. 280E generally stops applying to state-licensed medical activity from this point forward.
A broader DEA hearing on moving all marijuana to Schedule III begins.
The DEA hearing is paused.
Broader rescheduling still pending. Adult-use remains Schedule I. IRS 280E guidance is on the priority guidance plan.
Why 280E is the whole ballgame
Section 280E of the Internal Revenue Code says a business "trafficking" in Schedule I or II controlled substances can't deduct ordinary business expenses. For cannabis, that has meant no deduction for most rent, payroll, marketing, utilities or professional fees outside of cost of goods sold. In practice, many operators end up paying federal tax on something close to gross profit, with effective rates far above a normal business.
The one big thing 280E doesn't block is cost of goods sold, because COGS reduces gross income rather than being a deduction. That's why inventory costing under IRC 471 (and 263A where it applies) has been the main lever for cannabis tax planning.
Medical vs adult-use vs dual-license
What the change means for you depends on how you're licensed.
Medical-only
Medical activity is Schedule III, so 280E generally no longer applies going forward.
Your to-dos: new tax planning, Schedule III registration recordkeeping and cleaner books that clearly show your activity is medical.
Adult-use only
Still Schedule I. 280E still applies exactly as before.
Your to-dos: airtight COGS and inventory costing (471/263A), strong documentation and watching the DEA hearing.
Dual-license
Medical activity is Schedule III; adult-use is still Schedule I. You're now running two tax worlds under one roof.
Your to-dos: separate the activities and allocate shared costs with a defensible method.
| Question | Medical | Adult-use |
|---|---|---|
| Federal schedule (mid-Oct 2026) | Schedule III | Schedule I |
| 280E applies? | Generally no, from April 28, 2026 | Yes |
| COGS / inventory costing | Still matters for accurate books | Critical, the main lever |
| Biggest new task | Planning & recordkeeping | Documentation & costing |
The dual-license split
If one building, one team or one set of books serves both medical and adult-use customers, the IRS will expect you to separate the two. Costs that clearly belong to one side go to that side. Shared costs get allocated using a method that is reasonable, consistent and documented. Common allocation keys include:
- Square footage for rent, utilities and facility costs
- Plant counts or canopy for cultivation labor and inputs
- Sales mix for retail payroll and point-of-sale costs
- Labor hours or headcount for shared staff
- Revenue for general and administrative overhead
The method you pick, and whether your records support it, can move your federal tax bill a lot. It's also the kind of thing that's much easier to set up correctly during the year than to reconstruct after it. That's exactly what our free Schedule III Split Check is for.
About prior years: the IRS has signaled it doesn't see rescheduling as reopening closed tax positions. Don't assume you can amend old returns to drop 280E. Get advice on your specific facts first.
What to do now: a checklist
- Confirm exactly how you're licensed.Medical, adult-use or both, by location and entity. Write it down.
- Map your revenue streams.Can your POS and seed-to-sale data show medical vs adult-use sales cleanly? If not, fix that first.
- List your shared costs.Rent, utilities, payroll, security, software, insurance, admin. Anything that serves both sides.
- Choose and document allocation keys.Pick a reasonable method for each cost pool and write a short memo explaining why.
- Tighten COGS and inventory costing.Especially for adult-use, make sure costs that belong in inventory under 471/263A are captured.
- Set up Schedule III recordkeeping.Medical operators should review registration and recordkeeping requirements that come with Schedule III.
- Revisit your 2026 tax estimates.The April 28 effective date may split your year. Update projections before your next estimated payment.
- Watch the DEA hearing and IRS guidance.Both could change the picture. Build processes that can adapt.
Book a Free Schedule III Split Check
Frequently asked questions
Is all cannabis Schedule III now?
No. As of mid-October 2026, only state-licensed medical cannabis and FDA-approved cannabis products moved to Schedule III, under an order signed April 22, 2026 and effective April 28, 2026. Adult-use (recreational) cannabis is still Schedule I.
Does 280E still apply to my dispensary?
It depends on what you sell. Section 280E applies to trafficking in Schedule I and II substances. State-licensed medical activity is now Schedule III, so 280E generally no longer applies to it. Adult-use activity is still Schedule I, so 280E still applies.
I have both medical and adult-use licenses. What do I do?
You'll likely need to separate the two activities and allocate shared costs (rent, labor, utilities, overhead) between them using a reasonable, consistent and documented method. That allocation can have a large effect on your federal tax, so it's worth getting right.
Can I amend prior-year returns to remove 280E?
Be careful. The IRS has signaled it doesn't view rescheduling as reopening closed tax positions for prior years. Talk to a qualified tax professional about your specific situation before filing anything.
Is the broader rescheduling of all marijuana done?
Not yet. A DEA hearing on moving all marijuana to Schedule III began June 29, 2026, was paused September 29, 2026 and was still pending as of mid-October 2026.
Will the IRS issue new 280E guidance?
The IRS has placed 280E guidance on its priority guidance plan. Until it's issued, operators should keep detailed records and use a defensible allocation method.
Last reviewed October 15, 2026. This guide is general information about federal developments as of mid-October 2026 and may not reflect later changes. It is not legal or tax advice for your specific situation.