What Is Section 280E? How Schedule III Changes Cannabis Taxes

Section 280E of the Internal Revenue Code is the single biggest reason cannabis companies pay far higher effective tax rates than other businesses. Federal rescheduling is changing that, but only for some operators and only going forward.

This explainer covers what 280E is, who it applies to after the 2026 Schedule III order, and what operators should know about refunds.

What is Section 280E?

Section 280E says a business cannot deduct or take credits for ordinary business expenses if its trade or business consists of “trafficking” in a Schedule I or Schedule II controlled substance.

Congress added it to the tax code in 1982, after a tax court allowed a drug dealer to deduct business expenses. It was aimed at illegal drug trafficking, but because marijuana has been a Schedule I substance, it has applied to state-legal cannabis businesses for years.

In practice, a cannabis company can generally subtract its cost of goods sold, but not expenses such as rent, payroll for non-production staff, marketing or administrative costs. That means it is taxed on something much closer to gross profit than to net income, which is why many operators report tax bills larger than their actual profit.

How Schedule III changes 280E

Because 280E only applies to Schedule I and II substances, moving marijuana to Schedule III takes a business outside the rule.

Medical cannabis. On April 23, 2026, the Justice Department moved state-licensed medical marijuana and FDA-approved marijuana products to Schedule III. Qualifying medical operations can now deduct ordinary business expenses going forward. A federal appeals court declined to suspend that order while legal challenges continue.

Adult-use cannabis. Recreational marijuana remains Schedule I while the DEA’s broader rescheduling proceeding continues, so adult-use businesses remain subject to 280E. That proceeding was paused on September 29, 2026. See the full rescheduling timeline.

Dual-license operators. Companies with both medical and adult-use licenses are looking at separating those operations so the medical side can capture the benefit. Attorneys note that some states require both licenses to sit in one entity, so this may need state regulators to act. Read more on what operators are weighing after the order.

Can cannabis companies get past 280E taxes back?

Don’t count on it.

The April 2026 order asks the Treasury Secretary to consider retrospective 280E relief, but no guidance has followed. Meanwhile, the IRS said in 2024 that amended returns claiming 280E relief were not entitled to refunds, and the Justice Department sued TerrAscend to recover an $8.3 million refund issued for the 2020 tax year.

Some advisers suggest protective refund claims for years whose three-year amendment window is about to close. A protective claim keeps the door open if guidance becomes favorable, but it does not guarantee a refund.

Why 280E matters for cannabis stocks

For public operators, removing 280E can transform reported profitability and cash flow, which is why rescheduling news moves cannabis stocks. Publicly traded multistate operators carry an estimated $1.6 billion in uncertain tax positions tied to 280E. When rescheduling was delayed in September, cannabis stocks fell.

Tax relief also changes how lenders and investors view the sector. See who can still borrow in cannabis and how REITs are positioned while they wait.

Frequently asked questions

Does 280E still apply to cannabis businesses?

It applies to businesses trafficking in Schedule I or II substances. Since April 2026, qualifying state-licensed medical operations handle a Schedule III substance and fall outside 280E going forward. Adult-use businesses are still subject to it.

Will rescheduling refund past 280E taxes?

Not automatically. Rescheduling is not retroactive, and the IRS has challenged amended returns seeking 280E refunds. Treasury has been asked to consider retrospective relief but has not issued guidance.

What can a cannabis business deduct under 280E?

Generally only cost of goods sold. Ordinary operating expenses such as rent, marketing and administrative salaries are not deductible while 280E applies.

This article is for general information and is not tax advice. Operators should consult a qualified tax professional.