Does 280E Still Apply in 2026? Medical vs. Adult-Use Cannabis After Schedule III

Does 280E still apply in 2026?

Section 280E disallows ordinary and necessary business deductions for any trade or business that consists of trafficking in a controlled substance listed in Schedule I or Schedule II. The statute is unchanged. What changed is the schedule input: a DEA final rule published April 28, 2026 placed FDA-approved marijuana products, and marijuana subject to a qualifying state-issued medical marijuana license, into Schedule III, and established an expedited federal registration process for entities holding those state medical licenses.

That rule is written around medical activity. It does not, on its face, reschedule adult-use recreational cannabis. So the honest answer for a Maryland licensee is conditional: some activity may now sit outside the Schedule I and II trigger, and other activity almost certainly does not. No cannabis operator should assume every dollar of revenue now receives identical federal tax treatment, and none should assume the question has been settled. Treasury and the IRS have not published guidance addressing how Section 280E applies to a business conducting both kinds of activity, and until they do, the practical answer is a documentation problem before it is a tax position.

This guide is educational. It is not tax advice, and it does not tell any operator to take a filing position. For the mechanics of cost of goods sold under the current rules, see our Maryland 280E guide.

Medical vs. adult-use cannabis: why the difference matters for 280E

Section 280E keys off the schedule status of the substance in which the business traffics. When one category of activity moves to Schedule III and another does not, the two categories no longer share the same starting point in the analysis. That is a structural difference, not a rate difference — it can change which costs sit below the gross income line for one part of a business and not the other.

Maryland makes this unusually concrete. When adult-use sales began in July 2023, Maryland converted its existing medical licensees into dual licensees, so the typical Maryland dispensary today serves certified medical patients and adult-use customers from the same storefront, the same staff, and largely the same inventory. Cultivators and processors licensed by the Maryland Cannabis Administration supply both channels through the same rooms, the same labor, and the same seed-to-sale tracking. Maryland is not a market where medical and adult-use operations sit in separate buildings under separate entities — it is a market built on mixed operations.

Maryland operators already draw one medical/adult-use line for state purposes: the 12% adult-use cannabis sales and use tax that took effect July 1, 2025, remitted to the Comptroller of Maryland, with medical patient sales treated differently. That is a revenue-side distinction, and it is a genuine head start — see our Maryland cannabis sales tax guide. The federal question is harder, because it reaches the cost side too.

The mixed-use cannabis accounting problem

Consider a hypothetical Maryland dual licensee operating a single dispensary in the Baltimore metro. Roughly a fifth of transactions are certified patient sales; the rest are adult-use. One inventory pool serves both. Budtenders ring both at the same register. Rent, security, monitoring, insurance, POS and seed-to-sale software, and the general manager's salary all support the whole store. Nothing in that operation was designed to produce two sets of federal tax facts, because until 2026 there was no reason it should.

If federal treatment ultimately differs by activity, that operator has to answer a chain of questions from its own records: which revenue belongs to which activity; which units of inventory and which cost dollars were consumed by each; how much of payroll supported each; and on what basis rent, utilities, security, software, and professional services were divided. The revenue answer usually exists because the register already distinguishes patient transactions. The cost answers usually do not.

There is no IRS-approved allocation methodology for splitting cannabis costs between medical and adult-use activity. That has not been published, and this guide will not invent one. What can be built now is the underlying record: revenue segmentation, departments or classes in the chart of accounts, direct costs coded directly, indirect and shared costs isolated in their own accounts, payroll tracked by function and time, inventory and COGS traceable to product and channel, POS and seed-to-sale exports retained, and every allocation supported by contemporaneous documentation rather than a year-end reconstruction. An allocation built after the fact is the single most common reason a position collapses under examination.

Cannabis 280E expense allocation and apportionment

Shared expenses are where this becomes a real accounting project. In a single-treatment world, a shared cost only has to be classified correctly — deducted or disallowed, inventoriable or not. In a two-treatment world, the same cost also has to be apportioned, and the apportionment has to be explainable years later to someone who was not there.

• Rent and occupancy for premises serving both medical and adult-use activity
• Retail payroll for staff who serve certified patients and adult-use customers in the same shift
• Management and executive compensation across the licensed entity
• Security services, monitoring, and required physical controls
• Utilities, including production-side power at a cultivation or processing site
• Point-of-sale, seed-to-sale, and accounting software subscriptions
• Insurance covering the licensed premises and operations
• Professional services — accounting, legal, and consulting
• Shared facilities such as vaults, back-of-house storage, and delivery vehicles

The defensible practice is unglamorous: choose a rational basis tied to how the cost is actually consumed, apply it consistently, and record the basis and the data behind it in the period it is used. Square footage for occupancy, tracked time for labor, transaction or unit counts for retail overhead, and metered or engineered usage for production utilities are the kinds of measures that survive scrutiny because they can be verified from independent records. None of that promises deductibility. It preserves the ability to claim deductibility if the law permits it. Our internal controls and reconciliation work exists largely to make those records exist by default.

Chart of accounts after Schedule III

Most Maryland cannabis charts of accounts were designed to answer one question: what did we sell and what did it cost. A dual-treatment federal environment adds a second dimension — which activity — and the cheapest time to add a dimension is before you need it.

• Revenue split at the account level: medical patient sales, adult-use sales, non-cannabis merchandise, wholesale transfers
• Contra-revenue for discounts, loyalty, and returns recorded against the matching revenue account
• Inventory held so that units and cost can be traced to the activity that ultimately sells them
• Cost of goods sold mirroring the revenue structure so gross margin can be read by activity
• Payroll and labor coded by function and, where staff work across activities, by tracked time
• Shared overhead in dedicated accounts rather than buried in a catch-all, with an allocation basis documented
• Departments or classes for medical and adult-use activity, plus location dimensions for multi-site groups
• A monthly reconciliation set — POS to deposits, inventory to seed-to-sale, subledger to general ledger
• Workpapers stored with the period they support, not rebuilt at year end

For a full account structure to start from, see the Maryland cannabis chart of accounts guide. Restructuring accounts changes bookkeeping classification only — it does not itself determine federal tax treatment.

Inventory and COGS still matter

Cost of goods sold is not a deduction; it is a reduction of gross receipts. That is why it survived 280E in the first place, and why it does not lose importance if part of a business moves out from under 280E. For activity still inside the statute, COGS remains the only meaningful lever on taxable income. For activity that may move outside it, inventory cost is still the basis of gross margin, and the same records have to support both sides of the split.

Practically, that means perpetual inventory that reconciles to seed-to-sale records, documented cost layers, adjustments and waste recorded with support rather than plugged, and a monthly tie-out from the subledger to the general ledger. Our Maryland inventory accounting guide and METRC reconciliation guide cover the mechanics; the cannabis bookkeeping guide covers the daily discipline underneath them.

Documentation and audit defense

A changing federal tax environment makes clean accounting more valuable, not less. Positions taken during a period of unresolved guidance are exactly the positions most likely to be reviewed later, and the review will be conducted against records, not intentions. The IRS marijuana industry guidance has consistently emphasized substantiation.

• POS reports by day, by activity, and by product category, retained in raw form
• Seed-to-sale records and transfer manifests matching physical movement
• Payroll registers with function, department, and time detail
• Vendor invoices and purchase records supporting inventory cost
• Physical count sheets and documented inventory adjustments
• Allocation workpapers showing the basis, the source data, and the period applied
• A written accounting policy describing classification and allocation decisions
• Supporting schedules tying financial statements to the return
• Monthly reconciliations among POS, deposits, inventory, and the general ledger

What Maryland cannabis businesses should do now

Maryland's specific situation — a dual-license market where medical and adult-use activity share premises, staff, and inventory, under MCA seed-to-sale oversight and a Comptroller sales tax regime that already separates the two revenue streams — means the preparation work is unusually well defined. None of it requires taking a tax position, and all of it is useful regardless of how federal guidance lands.

• Keep the books current — a monthly close that closes, with no open reconciling items carried forward
• Separate medical and adult-use revenue at the register and in the general ledger, not just on the Maryland tax return
• Reconcile inventory to seed-to-sale records monthly and document every adjustment
• Record shared costs where they occur and write down the allocation basis contemporaneously
• Maintain payroll records that show function and, where relevant, time spent by activity
• Preserve source documentation: invoices, POS reports, transfer manifests, count sheets, bank records
• Write a short accounting policy memo describing how the business classifies and allocates costs
• Be ready to implement future federal guidance without rebuilding the accounting system

Cultivators and processors have an added dimension: production labor and production overhead that feed both channels through shared rooms and shared equipment. Retail operators in dense markets like Baltimore, Rockville, and Silver Spring usually have the higher transaction volume and the messier shared-cost picture. Both start from the same place: monthly cannabis accounting and bookkeeping that closes on time, and CFO-level reporting that can model the outcomes.

Questions Maryland cannabis operators should ask their CPA

• Does 280E currently apply to all of our activity, or only part of it?
• Can our accounting system distinguish medical from adult-use activity today, without manual rework?
• How are shared expenses tracked right now, and on what documented basis?
• Is payroll tracked by actual activity where employees serve both patient and adult-use customers?
• Can inventory and cost of goods sold be substantiated by license type and by product?
• Do POS, seed-to-sale, and accounting records reconcile every month, with variances explained?
• What documentation supports our current federal accounting treatment if it is examined?
• What accounting changes would we need to make quickly if Treasury or the IRS issues guidance mid-year?
• Are we positioned to evaluate protective claims or method changes if they become appropriate?

Frequently asked questions

This guide reflects publicly available federal and Maryland information as of September 2026 and will be revised as Treasury or IRS guidance is issued. It is educational and general in nature, not tax or legal advice for any specific business. For your own facts, contact our Maryland cannabis CPA team or read the Maryland cannabis accounting FAQ.