Cannabis Banking Glossary

280E

Section 280E of the Internal Revenue Code bars businesses that traffic in Schedule I or II controlled substances from deducting ordinary business expenses, other than cost of goods sold. Since April 2026 it no longer applies to marijuana activity covered by a qualifying state medical license, but it still applies to adult-use activity.

What Section 280E says

Section 280E of the Internal Revenue Code was added in 1982. It says a business cannot deduct expenses or claim credits if its trade or business consists of trafficking in a Schedule I or Schedule II controlled substance. Cost of goods sold is not a deduction under the tax code, so it can still be subtracted from gross receipts. Everything else, including rent, payroll, marketing and most overhead, cannot.

Because cannabis businesses pay tax on gross profit rather than net income, effective federal tax rates have often been far higher than the rates ordinary businesses pay. Many operators report paying federal tax even in years when they lose money.

What changed in April 2026

In April 2026, the federal government moved marijuana covered by a qualifying state medical license to Schedule III. Section 280E applies only to Schedule I and II substances, so it no longer applies to that medical activity. Adult-use marijuana remains in Schedule I, so adult-use activity is still subject to 280E.

What this means in practice

  • Medical-only operators may be able to deduct ordinary business expenses for their licensed medical activity.
  • Operators with both medical and adult-use activity need clear records that separate the two, including revenue, inventory and shared costs, so each can be taxed correctly.
  • Adult-use-only operators continue to be limited to cost of goods sold.

Treasury and IRS guidance on how the change applies is still developing. Clean, audit-ready books are the best preparation for whatever form that guidance takes.

How Safe Harbor helps

Safe Harbor's strategic finance and back-office support teams help operators keep accounting records that hold up to review, including separating medical and adult-use activity. Read more about what rescheduling means for operators.

Related terms

Schedule III and rescheduling · Bank Secrecy Act · Full glossary

This page is for general information only and is not tax or legal advice. Consult a qualified tax professional about your situation. Last reviewed November 2026.