The Internal Revenue Service and U.S. Department of the Treasury are preparing long-awaited guidance on how federal marijuana tax rules should operate after the government moved qualifying medical cannabis into Schedule III. The issue has now been formally added to Treasury and the IRS’s 2026–2027 Priority Guidance Plan, placing Internal Revenue Code Section 280E among the tax projects the agencies intend to address during the federal fiscal year running from October 1, 2026, through September 30, 2027. For the legal cannabis industry, the development represents one of the most consequential financial pieces of federal marijuana reform to emerge from the Schedule III process.
The significance comes from Section 280E, a four-decade-old provision that has prevented marijuana businesses from deducting many ordinary expenses available to virtually every other legal industry. The Department of Justice’s April 2026 order moved certain state-licensed medical marijuana products and FDA-approved marijuana products from Schedule I to Schedule III, potentially removing qualifying medical operations from 280E’s reach. Adult-use marijuana, however, remains federally classified as Schedule I under the current framework. That split has created a new set of tax questions involving mixed medical and recreational businesses, shared expenses, the treatment of the 2026 tax year and precisely which activities can begin claiming ordinary deductions.
Section 280E Has Defined Cannabis Taxation for Decades
Congress enacted Section 280E in 1982 after a taxpayer involved in illegal drug trafficking successfully claimed ordinary business deductions related to his operation. The statute was designed to prevent businesses trafficking in controlled substances from using the normal deductions available under federal tax law. Its language specifically applies to businesses trafficking in substances listed under Schedule I or Schedule II of the Controlled Substances Act. Marijuana’s longstanding Schedule I status therefore brought state-licensed cannabis companies squarely within the provision even when their operations were completely legal under state law.
The consequences have been unusually severe. A typical business can deduct payroll, rent, utilities, insurance, advertising, professional services and many other ordinary and necessary expenses before calculating taxable income. Marijuana businesses subject to 280E have generally been unable to deduct those costs. They have been permitted to reduce gross receipts by properly calculated cost of goods sold, but they often pay federal income tax on something much closer to gross profit than true net profit. That distinction has produced effective tax burdens far higher than businesses in conventional industries and has been especially difficult for retailers with large labor, security, real estate and marketing expenses.
Schedule III Changes the Tax Equation for Medical Marijuana
The reason Schedule III matters so much for taxes is straightforward: Section 280E expressly targets Schedule I and Schedule II controlled substances. Schedule III substances are not included. When the Justice Department moved FDA-approved marijuana products and qualifying state-licensed medical marijuana products into Schedule III in April, Treasury and the IRS immediately acknowledged that the action was expected to produce significant positive tax consequences for affected medical marijuana businesses.
That does not mean marijuana was federally legalized. Schedule III remains part of the Controlled Substances Act, and marijuana businesses continue operating within a complicated overlap of federal and state rules. The April action also did not place the entire commercial marijuana market into Schedule III. Instead, it created a distinction between qualifying medical marijuana activity and cannabis that remains outside the order, most importantly the adult-use market. For tax purposes, however, moving an activity from Schedule I to Schedule III can be transformative because the specific restriction written into Section 280E no longer applies in the same way once the business is no longer trafficking in a Schedule I or II substance.
Treasury and IRS Have Made 280E Guidance an Official Priority
The newest development came with Treasury’s September 29 release of the 2026–2027 Priority Guidance Plan. Among 121 projects identified for agency attention, the document lists simply “Guidance under §280E” under its other priorities. The wording is brief, but its inclusion gives formal status to a process Treasury and the IRS first announced in April after the medical marijuana scheduling change.
A Priority Guidance Plan does not guarantee that regulations or other guidance will appear by a particular date. Treasury specifically explains that the plan identifies projects on which the agencies intend to focus their resources without establishing mandatory completion deadlines. Even so, formally listing Section 280E is important. Cannabis businesses have spent months waiting to learn exactly how the IRS will administer the transition, particularly companies with both medical and adult-use operations. The addition signals that federal tax authorities recognize the need to create workable rules rather than leaving businesses to interpret the new scheduling structure entirely on their own.
Mixed Medical and Adult-Use Businesses Present the Biggest Challenge
One of the most difficult questions involves cannabis companies that operate both medical and recreational businesses from the same organization or even the same facility. A dispensary may sell products to registered medical patients and adult-use consumers through one storefront, using the same employees, security systems, management staff, accounting department, utilities and property. Under the new federal framework, qualifying medical activity may no longer be subject to Section 280E, while recreational activity could remain subject to it because adult-use marijuana continues to fall within Schedule I.
Treasury has already indicated that forthcoming guidance is expected to explain how Section 280E applies when a company conducts multiple activities. Expense allocation is likely to become central. Consider a dispensary that pays $50,000 each month in rent while generating part of its revenue from qualifying medical sales and the remainder from adult-use sales. Similar questions arise for payroll, security, insurance, software, utilities, professional services and corporate management expenses. Federal guidance will need to explain how businesses should divide shared costs between activities subject to 280E and those that are no longer subject to it, and what records the IRS expects taxpayers to maintain to support those allocations.
The 2026 Transition Rule Could Be Extremely Important
Another major issue is when the tax change begins. Treasury and the IRS said in April that they expected to establish a transition rule under which medical marijuana rescheduling would generally be treated as applying for the full taxable year containing the effective date of the Justice Department’s final order. For a cannabis company using the calendar year as its tax year, that could make the tax treatment applicable throughout 2026 rather than only to expenses incurred after the federal scheduling action occurred in April.
That possibility could materially change 2026 financial results for qualifying medical operators. Businesses that spent the first months of the year assuming the old 280E framework would continue may ultimately be able to deduct qualifying expenses for the entire year, depending on the final guidance and their individual circumstances. Treasury’s earlier announcement strongly signaled that a full-year transition rule is intended, but operators still need the official guidance to determine exactly how the rule will work, how mixed businesses should apply it and what documentation will be required.
Ordinary Business Deductions Could Reshape Medical Cannabis Finances
Removal of the 280E barrier does not create special deductions for marijuana businesses. Instead, it potentially allows qualifying medical cannabis activities to use many of the same federal tax rules that already apply to ordinary businesses. Expenses such as employee compensation, rent, advertising, insurance, legal and accounting services, utilities and other normal operating costs could become deductible when they meet the usual requirements of federal tax law.
The difference can be substantial. Under 280E, a profitable-looking tax return may conceal a business generating very little economic profit because major operating expenses cannot be deducted. Once those expenses become deductible, taxable income more closely reflects actual business earnings. Cannabis companies could also gain access to federal tax credits previously blocked by 280E, although each credit has its own qualification rules. The changes could affect cash flow, investment decisions, hiring, expansion plans and company valuations across medical marijuana markets.
Cost of Goods Sold Will Remain Part of the Accounting Picture
For years, cannabis tax planning has placed extraordinary emphasis on cost of goods sold because it represented one of the few mechanisms available to reduce gross income despite Section 280E. Producers and retailers have carefully analyzed which costs could properly be included in inventory under federal accounting rules, while courts and the IRS have rejected attempts to disguise otherwise nondeductible operating expenses as inventory costs.
Schedule III changes that dynamic for qualifying medical activities. Once ordinary deductions become available, businesses may no longer need to push accounting strategies to the limits simply to recognize legitimate operating expenses. Cost of goods sold will remain an important part of determining gross profit, but the relationship between inventory accounting and ordinary deductions becomes more comparable to other industries. For mixed-use cannabis businesses, however, accounting may actually become more complex in the short term because companies will need systems capable of separating Schedule III medical activity from Schedule I adult-use activity.
Detailed Records Could Become More Important, Not Less
The prospect of tax relief does not mean cannabis accounting will suddenly become simple. Businesses operating in both markets may need more detailed records than ever. Revenue could have to be classified by medical and adult-use sales, while expenses may need to be directly assigned or reasonably allocated between different business activities. Payroll records could become important where employees perform work for both sides of an operation, and shared facilities may require defensible methods for dividing occupancy and overhead expenses.
Federal guidance could therefore influence how cannabis companies structure everything from point-of-sale systems to employment records and corporate entities. Businesses that have historically treated their entire marijuana operation as a single 280E activity may have to develop more granular accounting. The central issue will be proving which expenses belong to activities that are no longer trafficking in Schedule I or II substances and which remain tied to activities still covered by 280E.
Adult-Use Marijuana Does Not Receive the Same Tax Relief Yet
The distinction between medical and recreational marijuana is critical. The April federal order did not broadly move all marijuana commerce into Schedule III. Adult-use products generally remain in Schedule I, meaning recreational cannabis businesses cannot simply assume Section 280E has disappeared. A company operating only in the adult-use market could therefore continue facing essentially the same federal deduction restrictions that have applied for years.
The federal government is separately considering broader marijuana rescheduling that could eventually change that situation. DEA hearings on moving marijuana more generally from Schedule I to Schedule III concluded this summer, but the proceeding was paused on September 29 while the administrative law judge considers whether a new Government Accountability Office report on federal drug-scheduling procedures should be added to the record. That broader process is distinct from the April medical marijuana order and remains unresolved. Until federal law changes again, medical and recreational cannabis can occupy very different positions for purposes of Section 280E.
Prior Tax Years Remain an Unsettled Issue
Another important question concerns taxes already paid under Section 280E. Some cannabis businesses have challenged the provision or pursued refund strategies for prior years, arguing through various legal theories that they should be entitled to deductions previously denied. The new Schedule III status for qualifying medical marijuana does not automatically establish that earlier taxes were improperly collected when marijuana was still treated as Schedule I.
Treasury’s April announcement focused primarily on a transition rule for the taxable year containing the effective date of the Schedule III order. It did not promise broad retroactive relief for earlier tax years. That means the clearest expected benefit currently concerns 2026 and future years for qualifying medical activity. Questions surrounding amended returns, protective refund claims and ongoing tax litigation involve separate legal arguments that may continue even after Treasury publishes its new 280E guidance.
Why Federal Guidance Matters to the Cannabis Industry
Few federal policies have affected cannabis company profitability as directly as Section 280E. Businesses in mature marijuana markets have faced falling wholesale prices, intense competition, high state and local taxes, expensive regulatory requirements and limited access to conventional financial services while simultaneously paying federal taxes without normal business deductions. Eliminating 280E from qualifying medical operations could therefore provide financial relief without changing retail prices, licensing limits or state tax rates.
The effect will vary dramatically by company. A medical-only operator with high payroll and retail expenses could see a substantial change in taxable income, while an adult-use operator may see little immediate benefit. Vertically integrated companies with cultivation, manufacturing, medical retail and recreational retail operations may face the most complicated calculations. The eventual IRS rules on allocation could determine whether companies can clearly separate activities or must apply more restrictive methods to shared expenses.
A New Phase of Federal Marijuana Tax Policy
The decision by Treasury and the IRS to put Section 280E guidance on their official 2026–2027 agenda marks a turning point in federal cannabis taxation. For decades, the basic rule was relatively simple even if its consequences were harsh: marijuana was a Schedule I substance, and businesses selling it were generally subject to 280E. The partial move to Schedule III has replaced that single framework with a divided system in which tax treatment can depend on whether marijuana activity qualifies as medical or remains within the federally restricted adult-use market.
What comes next will depend heavily on the guidance Treasury and the IRS ultimately publish. Businesses are waiting for rules governing expense allocation, the treatment of the full 2026 tax year, shared medical and recreational operations, documentation requirements and other technical issues that could determine millions of dollars in deductions. The federal scheduling debate remains unfinished, but for state-licensed medical marijuana operators, the tax consequences of Schedule III are moving from theory toward implementation. Section 280E has shaped the economics of legal cannabis for more than four decades; the coming IRS guidance may define how a large part of the industry finally begins operating outside its reach.
