Practitioner Guide

IRC 280E Cannabis Business Tax: DEA Rescheduling, COGS Deduction, and Practitioner Guide 2026

Last reviewed: July 2026

Americas Tax Organization | Published July 21, 2026 | For enrolled agents, CPAs, and tax attorneys

ALERT DEA RESCHEDULING REGULATORY ALERT

The Drug Enforcement Administration (DEA) issued a Final Order effective April 28, 2026, rescheduling marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA). Because IRC 280E expressly covers only controlled substances listed in Schedule I and Schedule II of the CSA, if this rescheduling is effective and not enjoined, IRC 280E may no longer apply to marijuana businesses for affected taxable years.

The status of the DEA Final Order must be verified before advising clients. The rescheduling may be subject to pending litigation, court injunctions, stays, or other legal proceedings. This guide covers both the continuing IRC 280E framework (applicable while marijuana remains a Schedule I or II controlled substance) and the potential post-rescheduling landscape. Practitioners must confirm current regulatory status at IRS.gov and DEA.gov before taking or recommending any tax position that depends on the rescheduling's effectiveness.

Key Points for Practitioners

IRC 280E prohibits all deductions and credits (other than cost of goods sold) for businesses trafficking in Schedule I or II controlled substances under the CSA.
COGS is deductible regardless of IRC 280E status (settled law confirmed in CHAMP v. Commissioner, T.C. 2007): COGS reduces gross receipts to arrive at gross income and is not a "deduction" IRC 280E disallows.
DEA rescheduling (April 28, 2026): If the rescheduling is effective and not enjoined, IRC 280E would no longer apply to marijuana businesses (IRC 280E expressly covers Schedule I and II only). Verify current status at DEA.gov and IRS.gov before advising clients.
If rescheduling is effective and upheld: cannabis businesses could deduct ordinary and necessary business expenses under IRC 162, subject to IRC 163(j), IRC 461(l), and all other generally applicable limitations.
COGS optimization under IRC 471 and proper capitalization under IRC 263A remain critical planning tools regardless of IRC 280E status.
Hemp is NOT subject to IRC 280E: the 2018 Farm Bill (Agriculture Improvement Act of 2018) descheduled hemp (0.3% or less delta-9 THC) from the CSA.
State tax treatment varies widely: many states have not decoupled from IRC 280E even where marijuana is legal; state-by-state analysis is required.
Transition-year planning (2025 and 2026) is critical: the DEA rescheduling was not in effect for the 2025 tax year; 2026 treatment depends on the current status of the Final Order. Hedge all transition positions to IRS.gov guidance.

Section 1: What IRC 280E Is and How It Operates

The Statutory Framework

IRC 280E provides that no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities that comprise such trade or business) consists of trafficking in controlled substances within the meaning of Schedule I and II of the Controlled Substances Act, which is prohibited by federal law or the law of any state in which such trade or business is conducted.

The critical operative phrase is "within the meaning of Schedule I and II of the Controlled Substances Act." Congress drafted IRC 280E with express reference to those two specific schedules. Schedule III, Schedule IV, and Schedule V controlled substances are not covered by IRC 280E's deduction disallowance. This textual limitation is central to understanding the potential effect of the April 28, 2026 DEA rescheduling.

Application to Cannabis Businesses

Marijuana (cannabis with a delta-9 THC concentration above 0.3%) was, until the April 28, 2026 DEA Final Order, classified as a Schedule I controlled substance under the CSA. As a Schedule I substance, marijuana sat squarely within IRC 280E's scope. Cannabis dispensaries, cultivators, processors, and other marijuana-touching businesses could not deduct ordinary and necessary business expenses under IRC 162. The only tax-reducing mechanism available was cost of goods sold (COGS), addressed in Section 2 of this guide.

The deduction disallowance under IRC 280E extends to ALL deductions and credits: wages above those properly allocated into COGS, rent above COGS allocation, advertising, legal and professional fees, security costs, insurance premiums, interest expense, depreciation on equipment above COGS allocation, and every other category of ordinary and necessary business expense that would otherwise qualify under IRC 162.

The Scope: Business Activity, Not Entity

IRC 280E applies at the business-activity level. The disallowance attaches to the trade or business that consists of trafficking in Schedule I or II controlled substances, not to the taxpayer entity as a whole. A taxpayer who operates two genuinely separate and distinct businesses, one cannabis and one non-cannabis, can deduct the expenses attributable to the non-cannabis business.

Olive v. Commissioner, T.C. 2012 (affirmed on appeal): The Tax Court analyzed whether a medical marijuana dispensary's ancillary wellness activities constituted a separate trade or business whose expenses fell outside IRC 280E's disallowance. Practitioners must analyze each client's specific facts under this framework. The IRS scrutinizes two-business structures; the non-cannabis activities must be genuinely separate, not a construct to shift expenses. Hedge all separate-business positions to the applicable case law, the specific facts of the client's operations, and current IRS audit positions.

The Economic Effect: An Illustrative Example

Illustrative Example (for structural illustration only; no specific tax amounts advised)

Consider a cannabis dispensary with $2,000,000 in gross revenue, $800,000 in cost of goods sold, and $900,000 in other operating expenses (wages, rent, security, professional fees, advertising, etc.).

Under IRC 280E (Schedule I environment): Taxable income is computed as $2,000,000 minus $800,000 COGS = $1,200,000. The $900,000 in other expenses is disallowed. The business pays tax on $1,200,000, not the economic net profit of $300,000.
If IRC 280E does not apply (post-rescheduling, if effective and not enjoined): Taxable income could be computed as $2,000,000 minus $800,000 COGS minus $900,000 in deductible expenses = $300,000 (subject to other applicable limitations). The tax burden would be substantially reduced.

This illustration demonstrates why the rescheduling question has profound tax consequences for cannabis businesses and why transition-year planning is critical. Confirm all specific tax computations against current IRC provisions and applicable IRS guidance.

Section 2: COGS -- The Only Deduction Under IRC 280E

Why COGS Survives IRC 280E

The foundational principle of cannabis tax practice under IRC 280E is that cost of goods sold (COGS) is not a "deduction" in the technical statutory sense. COGS reduces gross receipts to arrive at gross income; it operates at the gross income computation level, prior to any deduction from adjusted gross income. IRC 280E disallows "deductions" and "credits," not the computation of gross income. Therefore, COGS is available to cannabis businesses regardless of IRC 280E's application.

Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173 (2007): The Tax Court confirmed that while IRC 280E disallowed the deduction of caregiver expenses for a medical marijuana dispensary, the dispensary was entitled to reduce gross receipts by cost of goods sold. The COGS principle from CHAMP has been consistently applied in subsequent cases. Practitioners should verify the precedential scope of CHAMP and subsequent authorities as applicable in their jurisdiction and confirm against current case law and IRS guidance.

What Qualifies as COGS for a Cannabis Business

The composition of COGS for a cannabis business depends on whether the business is a cultivator/producer, a processor, or a retailer (or some combination). The governing provisions are IRC 471 (inventories) and, for businesses required to maintain inventories, IRC 263A (uniform capitalization rules, UNICAP).

Direct material costs: the cost of purchasing cannabis plant material, seeds, clones, or finished product for resale; the cost of ingredients and supplies directly consumed in producing the cannabis product.
Direct labor costs: wages and compensation paid to cultivators, trimmers, processors, and other employees directly involved in producing the cannabis inventory (not sales, administrative, or security staff).
Allocable overhead properly capitalized into inventory under IRC 471 and IRC 263A: a portion of rent attributable to the production facility, utilities in the production facility, depreciation on production equipment, production supervision wages, and similar costs that are genuinely allocable to the production or acquisition of the cannabis inventory.

COGS Maximization: Legitimate Planning Under IRC 471 and IRC 263A

Because COGS is the only tax-reducing mechanism available under IRC 280E (while it applies), cannabis tax practitioners focus significant effort on maximizing the amount of costs that can be properly capitalized into COGS. This is legitimate tax planning, not avoidance, provided the costs allocated to COGS are genuinely attributable to the production or acquisition of inventory.

Under IRC 471, inventory must be valued at cost (or cost or market, whichever is lower) using an acceptable inventory accounting method: first-in, first-out (FIFO), last-in, first-out (LIFO), specific identification, or weighted average cost. The choice of method can materially affect taxable income in a rising-cost environment.

Under IRC 263A, certain producers and resellers are required to capitalize additional indirect costs into inventory costs (the UNICAP rules). For cannabis businesses, the UNICAP interaction with IRC 280E is complex: capitalizing more indirect costs into inventory can increase COGS (beneficial under IRC 280E), but the UNICAP computation itself requires careful application. Hedge all UNICAP computations to IRC 263A, the applicable Treasury regulations, and current IRS guidance.

IRS Audit Risk: The IRS has audited cannabis businesses with high COGS ratios and aggressively challenged COGS capitalization claims that do not reflect genuine production cost allocations. Costs allocated to COGS must be genuinely associated with production or acquisition activities, not with retail, sales, security, or administrative functions. Document the allocation methodology, the basis for each cost included in COGS, and the production vs. retail square footage or headcount ratios used. Aggressive or unsupported COGS positions carry material audit risk.

The Two-Business Structure and COGS

A cannabis retailer who also operates a genuinely separate non-cannabis business (for example, a head shop selling general merchandise, or a wellness consulting service) may be able to deduct the expenses of that non-cannabis business under IRC 162, separate from the IRC 280E disallowance applicable to the cannabis business. Olive v. Commissioner established this two-business analysis, but the IRS scrutinizes these structures.

For the two-business structure to be respected: the non-cannabis activities must constitute a genuine, distinct trade or business; expenses must be accurately allocated between the cannabis and non-cannabis activities; and the non-cannabis business must have economic substance independent of the cannabis operation. Hedge all two-business positions to the specific facts of the client's operations, the applicable case law, and current IRS audit guidance.

Section 3: The DEA Rescheduling and Its Potential Effect on IRC 280E

Background: The DEA Final Order of April 28, 2026

The Drug Enforcement Administration issued a Final Order effective April 28, 2026, transferring marijuana from Schedule I to Schedule III of the Controlled Substances Act. This represents a significant change in the federal legal classification of marijuana, which had been classified as Schedule I since the CSA's enactment in 1970.

The IRC 280E Textual Analysis

IRC 280E expressly applies to controlled substances "within the meaning of Schedule I and II of the Controlled Substances Act." Schedule III is not included. If marijuana is reclassified to Schedule III and that reclassification is legally effective and not enjoined, the textual basis for applying IRC 280E to marijuana businesses is eliminated. Marijuana would no longer be a Schedule I or Schedule II controlled substance, and IRC 280E would not apply to it by its own terms.

This is a straightforward textual analysis: the statute's own language provides the limiting principle. Congress did not write IRC 280E to cover all controlled substances under the CSA; it limited the provision to Schedule I and Schedule II substances. The consequence of the rescheduling, if effective, follows directly from the statute's text.

HEDGE VERIFY BEFORE ADVISING

As of July 2026, the legal status of the DEA Final Order rescheduling marijuana to Schedule III must be independently verified before any practitioner advises a client that IRC 280E does not apply. Court challenges, preliminary injunctions, stays pending appeal, or Congressional action may have altered or suspended the effectiveness of the Final Order. Do not state definitively that IRC 280E no longer applies to marijuana businesses without confirming the current status of the DEA Final Order at DEA.gov and current IRS guidance at IRS.gov.

If the Rescheduling Is Effective and Upheld

If the DEA Final Order is legally effective, not enjoined, and not overridden by Congressional action, the following potential consequences flow from the textual analysis:

IRC 280E would not apply to marijuana businesses for taxable years in which marijuana is classified as a Schedule III (not Schedule I or II) controlled substance.
Marijuana businesses could deduct ordinary and necessary business expenses under IRC 162, including wages, rent, advertising, professional fees, security, insurance, interest, depreciation, and amortization, subject to all other generally applicable limitations (IRC 163(j), IRC 461(l), OBBBA provisions, passive activity rules, etc.).
COGS would remain the foundation of cannabis tax planning, but the full range of deductions would become available, substantially reducing the tax burden on economically profitable cannabis businesses.

Hedge all of these potential consequences to the current legal status of the DEA Final Order and applicable IRS guidance.

IRS Transition Guidance

The IRS is expected to issue (or may have issued by the time this guide is in use) transition guidance addressing the tax treatment of cannabis businesses in light of the DEA rescheduling. This guidance may address: the effective date for applying IRC 280E (or its non-application) in the transition year; whether any retroactive relief is available; how to handle open tax years and pending audits; and the treatment of COGS and inventory in the transition from a Schedule I to a Schedule III environment.

All transition mechanics must be confirmed against current IRS.gov guidance and Revenue Procedures or Notice releases addressing the rescheduling. Do not advise clients based solely on the textual IRC 280E analysis without confirming that IRS guidance is consistent with that position.

Caution on Retroactive Claims

No Retroactive Deductibility: Practitioners should NOT advise clients to amend prior-year returns to remove IRC 280E limitations based solely on the April 28, 2026 DEA rescheduling. A rescheduling that took effect on April 28, 2026 does not retroactively change the tax treatment of years in which marijuana was a Schedule I controlled substance. Any retroactive relief would require specific IRS guidance authorizing it. In the absence of such guidance, amending prior returns to remove IRC 280E limitations would be premature and potentially incorrect. Confirm all amendment positions against current IRS.gov guidance.

Section 4: Hemp vs. Marijuana -- The 2018 Farm Bill Distinction

Hemp: Descheduled from the CSA by the 2018 Farm Bill

The Agriculture Improvement Act of 2018 (the "2018 Farm Bill") removed hemp from the CSA entirely. Hemp is defined in the 2018 Farm Bill as cannabis (Cannabis sativa L.) and any part of that plant, including seeds, derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3% on a dry weight basis.

Because hemp is not a controlled substance under the CSA, hemp businesses are not subject to IRC 280E. Hemp cultivators, processors, distributors, and retailers can deduct all ordinary and necessary business expenses under IRC 162. The only tax limitations on hemp businesses are the generally applicable limitations that apply to any trade or business (IRC 163(j), IRC 461(l), at-risk rules, passive activity rules, etc.).

Marijuana: The Schedule I Line Prior to Rescheduling

Cannabis with a delta-9 THC concentration above 0.3% on a dry weight basis constituted marijuana under federal law and was classified as a Schedule I controlled substance under the CSA until the April 28, 2026 DEA Final Order. During that period, marijuana businesses were fully subject to IRC 280E's deduction disallowance (with COGS as the only exception, as discussed in Section 2).

Mixed Product Lines: Expense Segregation

Operators who sell both hemp-derived products (not subject to IRC 280E) and marijuana-derived products (subject to IRC 280E, subject to the rescheduling hedge) must maintain separate accounting for expenses attributable to each product line. The hemp business expenses are fully deductible; the marijuana business expenses are subject to IRC 280E (or potentially fully deductible post-rescheduling, if the Final Order is effective). Inadequate expense segregation creates both tax risk (disallowance of properly deductible hemp expenses) and audit risk.

Delta-8 THC and Synthetic Cannabinoids

Delta-8 THC products derived from hemp CBD through chemical conversion, as well as other synthetic cannabinoids, occupy a legally uncertain area. The DEA and FDA have taken varying positions on the scheduling status of these products. Practitioners advising clients with delta-8 or synthetic cannabinoid product lines should confirm the current scheduling status with DEA.gov and IRS.gov before applying (or not applying) IRC 280E to those product lines. Do not assume hemp-derived delta-8 products are free of IRC 280E concerns without confirming current regulatory status.

Section 5: Post-Rescheduling Tax Planning (If IRC 280E No Longer Applies)

Conditional Framing Required: Every item in this section is conditional on the DEA Final Order being legally effective, not enjoined, and applicable to the taxable year in question. Confirm the rescheduling's current status at DEA.gov and IRS.gov before advising clients on any of the following planning opportunities.

Full Business Expense Deductibility Under IRC 162

If the DEA rescheduling is effective and IRC 280E no longer applies to marijuana businesses, cannabis businesses become subject to the same tax rules as any other trade or business under IRC 162. All ordinary and necessary business expenses become deductible, including:

Employee wages and payroll expenses (above amounts already captured in COGS)
Rent on retail, administrative, and non-production facilities
Advertising and marketing expenses
Legal and professional fees
Security costs not allocable to production
Insurance premiums
Interest expense (subject to IRC 163(j), discussed below)
Depreciation on equipment, leasehold improvements, and other depreciable assets not previously included in COGS allocations
Amortization of intangibles (IRC 197)
All other ordinary and necessary business expenses

IRC 163(j): Business Interest Limitation Now Applies

Under IRC 163(j), the deduction for business interest expense is generally limited to the sum of business interest income, 30% of adjusted taxable income (ATI), and floor plan financing interest. For cannabis businesses that previously could not deduct interest under IRC 280E, the IRC 163(j) limitation becomes newly relevant once IRC 280E no longer applies. Cannabis businesses with significant debt financing should model the IRC 163(j) limitation in their post-rescheduling tax planning.

For a detailed analysis of IRC 163(j) mechanics, see our practitioner guide: IRC 163(j) Business Interest Limitation: OBBBA Update and Practitioner Guide.

IRC 461(l): Excess Business Loss Limitation Now Applies to Individual Owners

For individual taxpayers who own cannabis businesses through pass-through entities (S corporations, partnerships) or as sole proprietors, IRC 461(l) limits the deductibility of "excess business losses" (aggregate business deductions exceeding aggregate business income plus a threshold amount, indexed for inflation). Cannabis business owners who previously had no deductible losses under IRC 280E (because all deductions were disallowed) will now need to model the IRC 461(l) limitation if their cannabis business operates at a net loss in any year after IRC 280E no longer applies.

For a detailed analysis of IRC 461(l) mechanics, see our practitioner guide: IRC 461(l) Excess Business Loss Limitation: OBBBA Update and Practitioner Guide.

OBBBA Bonus Depreciation: IRC 168(n) Qualifying Production Property

The One Big Beautiful Budget Act (OBBBA) enacted 100% bonus depreciation for qualifying production property (QPP) under IRC 168(n). If IRC 280E no longer applies to cannabis businesses, cultivators and manufacturers who invest in qualifying production equipment (grow lights, extraction equipment, processing machinery, and similar qualifying production assets) may be eligible to immediately expense those investments under IRC 168(n) in the year placed in service.

For cannabis businesses that have historically been unable to deduct depreciation on most equipment (because IRC 280E disallowed it to the extent not capitalized into COGS), QPP bonus depreciation could represent a significant first-year tax benefit on new capital investments. Hedge all OBBBA QPP bonus depreciation claims to the enacted OBBBA provisions, IRC 168(n) as enacted and amended, the applicable asset class and production use requirements, and IRS.gov guidance.

2026 Estimated Tax Planning

Cannabis businesses that made estimated tax payments for 2026 based on an IRC 280E environment (paying tax on gross profit rather than net income) should reassess their 2026 estimated tax obligations if the DEA rescheduling is effective and IRC 280E no longer applies. The risk of over-withholding is significant: a business that has been paying estimated taxes on $1,200,000 of "gross profit" may have a far lower 2026 taxable income if it can now deduct $900,000 in operating expenses. Unnecessary overpayment creates a non-interest-bearing loan to the government.

Recalculate 2026 estimated tax obligations promptly once the rescheduling's legal status is confirmed. Hedge all transition-year estimated tax advice to current IRS guidance and the confirmed legal status of the DEA Final Order. State estimated tax payments require separate analysis with each applicable state tax authority.

Section 6: State Tax Treatment

The Federal-State Disconnect

State income tax treatment of cannabis businesses is a separate analysis from the federal IRC 280E analysis. Most state income taxes begin with federal taxable income (or federal adjusted gross income) as the starting point and then apply state-specific additions and subtractions. Whether a state follows the federal IRC 280E treatment (or its non-application after rescheduling) depends on the state's conformity to the Internal Revenue Code and any state-specific decoupling provisions.

Critically, many states where marijuana is legal under state law have not enacted their own equivalent deduction disallowance for cannabis businesses (because state law permits the activity). However, other states that conform to the IRC (by reference or rolling conformity) may follow the federal IRC 280E treatment. The DEA rescheduling's effect on each state's treatment of cannabis business deductions must be analyzed under that state's specific conformity provisions.

California

California generally conforms to the Internal Revenue Code for purposes of its personal income tax and corporation tax, with certain modifications. California marijuana businesses may have been subject to IRC 280E-equivalent treatment under California's IRC conformity. Following the April 28, 2026 DEA rescheduling, California's treatment of cannabis business deductions must be confirmed with the California Franchise Tax Board (CA FTB). California may conform to the federal change (potentially allowing deductions for 2026 and subsequent years) or may take independent action to maintain a state-level disallowance. Confirm at CA FTB before advising California cannabis clients on post-rescheduling state deductibility.

New York

New York State has its own income tax conformity framework. Following the DEA rescheduling, the treatment of marijuana business deductions under New York's tax law must be confirmed with the New York State Department of Taxation and Finance (NY DTF). Confirm at NY DTF before advising New York cannabis clients. For broader context on state income tax residency and domicile issues relevant to high-income cannabis business owners, see our guide: State Income Tax Residency and Domicile: The 183-Day Rule and New York Statutory Residency.

SALT Cap: IRC 164(b)(6) Still Applies

The SALT deduction cap of $10,000 per year (per return) under IRC 164(b)(6) remains in effect for individual taxpayers. Cannabis business owners deducting state and local income taxes should note that the OBBBA did not repeal the SALT cap. The $10,000 limitation on the deductibility of state and local taxes paid by individual taxpayers continues to apply to state income taxes attributable to cannabis business income. Confirm the current OBBBA SALT cap status at IRS.gov.

Record-Keeping for State Compliance

The mismatch between federal and state cannabis scheduling and tax treatment requires meticulous record-keeping. Practitioners advising multi-state cannabis operators should maintain:

State-by-state product classifications (hemp vs. marijuana, by state law and by CSA status)
Separate expense allocation schedules for each state in which the business operates
Documentation of each state's current conformity status regarding IRC 280E and the DEA rescheduling
Records of state estimated tax payments and any adjustments for the transition year

The state law landscape is changing rapidly following the DEA rescheduling. Practitioners should monitor state legislative and regulatory developments and update their clients' compliance plans accordingly.

Section 7: Transition-Year Planning for 2025 and 2026

The 2025 Tax Year: IRC 280E Applies in Full

The DEA Final Order rescheduling marijuana to Schedule III was effective April 28, 2026. This date is after the end of the 2025 calendar year (December 31, 2025). For calendar-year cannabis businesses, the rescheduling was not in effect at any point during the 2025 tax year. IRC 280E should apply to the full 2025 tax year for calendar-year marijuana businesses.

Practitioners should NOT advise clients to amend 2025 returns to remove IRC 280E limitations based on the rescheduling. The rescheduling has no retroactive effect on the 2025 tax year unless IRS guidance specifically provides otherwise. Confirm all 2025 return positions against current IRS.gov guidance and the status of the DEA Final Order.

Fiscal-year filers whose taxable year straddles calendar year 2025 and 2026 may present different facts; hedge all fiscal-year transition treatment to the specific year-end, the effective date of the DEA Final Order, and applicable IRS transition guidance.

The 2026 Tax Year: Transition Analysis Required

For calendar-year cannabis businesses, the DEA Final Order (effective April 28, 2026) became effective during the 2026 tax year. If the Final Order is legally effective and not enjoined, the question arises: does IRC 280E apply to the full 2026 tax year, only to the period before the effective date, or not at all for 2026?

This is a critical transition question that IRS guidance must resolve. The analysis could turn on: (a) whether IRC 280E applies based on the substance's schedule status at the beginning of the tax year, at the end of the tax year, at the time costs are incurred, or some other date; (b) whether short-period treatment applies; and (c) the specific terms of any IRS Revenue Procedure, Notice, or other guidance addressing the transition.

Do Not Advise Without IRS Guidance: Practitioners must not advise clients to take a 2026 return position that IRC 280E does not apply (or applies only for part of the year) without first confirming that position against current IRS.gov guidance specifically addressing the transition year. The absence of IRS guidance does not authorize a favorable tax position; it creates uncertainty that must be disclosed and managed.

Open Audits and Pending Matters

Cannabis businesses with open IRS audits, Tax Court petitions, or pending administrative appeals regarding IRC 280E disallowances should consult with counsel about whether the rescheduling affects those proceedings. The IRS may issue guidance addressing open years. Practitioners should monitor IRS.gov and the IRS Priority Guidance Plan for cannabis-related guidance.

Frequently Asked Questions

What is IRC 280E and why does it affect cannabis businesses?

IRC 280E prohibits all deductions and credits for businesses that traffic in controlled substances listed in Schedule I or Schedule II of the Controlled Substances Act. Because marijuana was classified as a Schedule I controlled substance under federal law, cannabis dispensaries, cultivators, and other marijuana businesses could not deduct ordinary business expenses under IRC 162. The only available tax-reducing mechanism was the cost of goods sold (COGS), which reduces gross receipts to arrive at gross income and is not technically a "deduction" under the statute. COGS is not subject to the IRC 280E disallowance (confirmed in CHAMP v. Commissioner, T.C. 2007).

What did the DEA rescheduling of marijuana mean for IRC 280E?

The DEA issued a Final Order effective April 28, 2026, rescheduling marijuana from Schedule I to Schedule III of the Controlled Substances Act. Because IRC 280E expressly covers only Schedule I and Schedule II substances, if this rescheduling is effective and not enjoined, IRC 280E would no longer apply to marijuana businesses. Practitioners must verify the current legal status of the DEA Final Order, including any litigation, injunctions, or stays, before advising clients. Do not state definitively that IRC 280E does not apply without confirming current status at DEA.gov and IRS.gov.

Can cannabis businesses still deduct their cost of goods sold under IRC 280E?

Yes. COGS is deductible (and has always been deductible) regardless of IRC 280E status. COGS reduces gross receipts to arrive at gross income and is not a "deduction" from adjusted gross income that IRC 280E disallows. This principle was confirmed in CHAMP v. Commissioner (T.C. 2007) and applied in subsequent cases. Maximizing COGS through proper inventory accounting under IRC 471 and appropriate capitalization under IRC 263A remains the primary tax planning strategy for cannabis businesses operating under IRC 280E or transitioning out of it. Hedge all COGS capitalization strategies to IRC 471, IRC 263A, and applicable IRS guidance; aggressive COGS positions may be challenged on audit.

Does the DEA rescheduling affect 2025 tax returns?

No, not directly. The DEA Final Order was effective April 28, 2026, after the end of the 2025 calendar year. IRC 280E should apply to the full 2025 tax year for calendar-year cannabis businesses; the rescheduling was not in effect for any portion of the 2025 tax year. Practitioners should NOT advise amending 2025 returns to remove IRC 280E limitations based solely on the rescheduling unless IRS guidance specifically authorizes retroactive relief. Confirm all 2025 return positions against current IRS.gov guidance and the status of the DEA Final Order. Fiscal-year filers should separately analyze their year-end and confirm with IRS guidance.

What is the difference between hemp and marijuana for IRC 280E purposes?

Hemp (cannabis with a delta-9 THC concentration of 0.3% or less on a dry weight basis) was descheduled from the Controlled Substances Act by the 2018 Farm Bill (Agriculture Improvement Act of 2018). Hemp businesses are NOT subject to IRC 280E and can deduct all ordinary and necessary business expenses normally under IRC 162. Marijuana (cannabis with more than 0.3% delta-9 THC) was a Schedule I controlled substance subject to IRC 280E until the April 28, 2026 DEA Final Order rescheduled it to Schedule III. Businesses with mixed hemp and marijuana product lines must maintain separate expense accounting for the two product types. Confirm the classification of all products against current DEA scheduling status and IRS.gov guidance.

What tax deductions become available if IRC 280E no longer applies to cannabis?

If the DEA rescheduling is effective and IRC 280E no longer applies to marijuana businesses, all ordinary and necessary business expenses under IRC 162 become deductible: employee wages (above COGS), rent on non-production facilities, advertising, legal and professional fees, security, insurance, interest expense (subject to IRC 163(j)), depreciation and amortization on assets not captured in COGS, and all other general business expenses. OBBBA's 100% QPP bonus depreciation under IRC 168(n) may also apply to qualifying cannabis production equipment, potentially allowing immediate expensing of qualifying capital investments. All post-rescheduling deductibility must be confirmed against the current status of the DEA Final Order and applicable IRS guidance.

Do states conform to the federal IRC 280E rules and the DEA rescheduling?

State income tax treatment of cannabis businesses varies significantly. Many states, even those where marijuana is legal under state law, have not decoupled from IRC 280E and may continue to disallow cannabis business deductions at the state level even if federal IRC 280E no longer applies after the DEA rescheduling. The rescheduling's effect on state tax law must be confirmed with each state's tax authority (for example, the California Franchise Tax Board or the New York State Department of Taxation and Finance). The state law landscape is changing rapidly; multi-state cannabis operators require state-by-state analysis and should monitor state legislative and regulatory developments closely.

Disclaimer: This guide is provided for general informational and educational purposes for tax practitioners. It does not constitute legal or tax advice and does not create a client relationship. The information in this guide reflects the regulatory status as of July 21, 2026, and is subject to change as the DEA Final Order, IRS guidance, and state tax laws evolve. All statements about the effect of the DEA rescheduling are conditional on the rescheduling being legally effective and not enjoined. Verify all positions against current IRS.gov guidance, DEA.gov, and applicable state tax authority websites before advising clients. Americas Tax Organization is an accounting and tax services firm; this guide does not constitute legal advice on controlled substances law. Consult with licensed legal counsel for legal questions regarding the Controlled Substances Act.