For most licensed dispensaries, the most expensive line in federal law has been Section 280E of the Internal Revenue Code. It bars any business trafficking in a Schedule I or II controlled substance from deducting ordinary business expenses. Rent, payroll, marketing and utilities all become non deductible. Many operators have paid effective federal tax rates far above what a normal retailer pays. In 2026 rescheduling started to change that, but only for part of the industry.

This post explains how 280E works, what the April 2026 federal rule did, who is covered, who is not and what open questions remain. It is general information. It is not tax or legal advice, and any business should work with a tax professional.

How 280E works

Section 280E is short. It says no deduction or credit is allowed for any amount paid in carrying on a trade or business that consists of trafficking in Schedule I or II substances. Courts have allowed businesses to subtract cost of goods sold, because that reduces gross receipts rather than counting as a deduction. Everything else is lost.

Expense type	Under 280E	Normal business
Cost of goods sold	Generally allowed	Allowed
Store rent	Not deductible	Deductible
Budtender wages	Not deductible	Deductible
Advertising	Not deductible	Deductible
Security and insurance	Not deductible	Deductible

The result is a tax on gross profit rather than net income. A store that breaks even on paper can still owe federal tax.

What the April 2026 rule did

A Department of Justice final rule effective April 28 2026 placed two groups of marijuana products in Schedule III. The first is drug products approved by the FDA. The second is marijuana held under a state issued license to manufacture, distribute or dispense marijuana for medical purposes. The rule text says that as a consequence, state medical licensees will no longer be subject to the 280E disallowance, because 280E reaches only Schedule I and II.

The rule also says nothing in it is a determination of federal tax liability, and it tells licensees to consult tax counsel. It encourages the Treasury to consider retroactive relief for past years, but it does not grant any.

The medical and adult use split

This is the part many operators miss. Marijuana sold under an adult use license stays in Schedule I until the broader federal proceeding finishes. A store that holds only an adult use license is still under 280E.

License held	Federal schedule	280E status
State medical license only	Schedule III	Relief stated in the rule
Adult use license only	Schedule I	Still applies
Both medical and adult use	Split by activity	Allocation questions
No state license	Schedule I	Still applies

Dual licensed operators face the hardest questions. If one store sells to both medical patients and adult customers, expenses may need to be split between activities. How to allocate shared rent, staff time and inventory is the kind of question tax professionals will argue over until guidance arrives.

Timing and the tax year

The rule took effect on April 28 2026. For calendar year taxpayers, that falls in the middle of the 2026 tax year. On April 23 2026 the Treasury and IRS said their planned guidance is expected to treat rescheduling as applying for the full taxable year that includes the effective date, for activity that no longer involves a Schedule I or II substance. That guidance has not been issued yet, so treat it as expected, not final. Operators should keep clean records that show dates, license types and which sales happened under which license.

The broader hearing

A separate federal hearing on moving all marijuana to Schedule III ran from June 29 to July 15 2026. It was stayed in late September over a new report. On October 22 the judge declined to reopen the record but allowed short briefs, with replies due November 5 2026. After that the judge issues a recommended decision to the DEA Administrator, with no deadline. If all marijuana moves to Schedule III, adult use operators would gain the same 280E relief. That has not happened.

Court challenges

Petitions in the D.C. Circuit challenge the April 2026 order. On September 9 that court refused to pause the order, so it stays in force while the case is briefed. A ruling against the order could change the 280E picture again. Any tax plan should account for that risk.

What dispensaries should do now

Confirm which of your licenses is a state medical license under your state’s law. Separate books for medical and adult use activity where you can. Document the date each expense was incurred. Talk with a tax professional about amended filings, estimated payments and whether to claim deductions before formal guidance. Watch for Treasury and IRS notices, since they will settle many of these questions.

A simple worked example

Picture a medical only store with one million dollars in sales and six hundred thousand dollars in cost of goods. Gross profit is four hundred thousand. Before the rule, rent, wages and other costs of three hundred thousand could not be deducted, so federal tax fell on the full four hundred thousand. If those costs become deductible, taxable income could drop to about one hundred thousand. The numbers are made up, and real returns involve many more details, but the gap shows why 280E relief matters so much to medical licensees.

Records to keep starting now

Keep license certificates with their effective dates. Keep point of sale reports that show which sales ran under which license. Keep payroll records with time splits if staff work both sides. Keep leases and invoices with dates. Good records will help whether guidance turns out generous or strict.

Questions to bring to your tax professional

Ask whether you should file amended returns for any part of 2026. Ask how to allocate shared costs for a dual licensed store. Ask what happens to your estimated payments if courts overturn the April order. Ask whether state tax returns that follow federal rules will change too, since many states tie their own deductions to the federal code.

Grow legally and responsibly

Home cultivation is only legal in some states, and each state sets its own plant limits, locking rules and rules about whether plants can be visible from a public place. You must be 21 or older to buy seeds from Kind Seed Co, and you should grow only where your state and city allow it. Check your state rules in our guide to the legal requirements for growing weed plants in your state before you plant. Federal treatment of cannabis seeds is also changing, so read our December 11 2026 seed rule explainer before you order. Keep plants and harvested flower locked away from children, pets and visitors, and never drive after using cannabis. This article is general information. It is not legal advice and it is not medical advice.

Frequently asked questions

Does rescheduling end 280E for all dispensaries?

No. The April 2026 rule covers marijuana under a state medical license. Adult use only operators are still under 280E until the broader proceeding ends.

Is there retroactive 280E relief?

Not for past years. The rule encourages the Treasury to consider it but grants none. For 2026, the Treasury and IRS have said planned guidance is expected to cover the full tax year that includes April 28 2026 for covered medical activity.

What about stores with both licenses?

They may need to split expenses between medical and adult use activity. Wait for guidance and work with a tax professional.

When will adult use marijuana move to Schedule III?

There is no date. Reply briefs in the broader hearing are due November 5 2026, and the decision comes later.

Final thoughts

The 280E story in 2026 is real relief for medical licensees and uncertainty for everyone else. Keep clean records, separate license activity and get professional advice before you file.

Ready to start

Browse the full range in the Kind Seed Co shop or go straight to kindseed.com. Kind Seed Co sells only to adults 21 and older. Always follow the cannabis laws where you live.