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

Does 280E Still Apply in 2026?

The short answer for planning purposes: assume it does until a specific change is final and effective for your tax year. Section 280E disallows deductions and credits for a trade or business trafficking in a Schedule I or Schedule II controlled substance. Cannabis has been the subject of a federal rescheduling process that would move it to Schedule III, and that process has been widely reported and widely misunderstood. Rescheduling is an administrative proceeding with procedural steps, an effective date, and follow-on tax questions that only Treasury and the IRS can answer. Until a final rule is effective and applies to your period, the disallowance continues to operate exactly as it always has. Filing a return that assumes an outcome which has not occurred, or which occurred after your year closed, exposes the business to adjustments, interest, and penalties. If you want the service side of this work, see our Ohio 280E tax compliance service.

• Established: Section 280E applies to businesses trafficking in Schedule I and Schedule II substances, and cost of goods sold is not a deduction it disallows.
• Changed: the federal scheduling status of cannabis has been actively reconsidered, which is why the question is being asked at all.
• Unresolved: how any change is administered for tax years that straddle an effective date, and how mixed medical and adult-use activity would be treated.
• Unresolved: whether Treasury or the IRS will publish an allocation methodology for shared costs, and what documentation it would require.
• Practical: no operator needs to guess at the answer to build books that support either outcome.

Medical vs. Adult-Use Cannabis: Why the Difference Matters for 280E

Ohio runs two programs side by side. The medical program operates under Chapter 3796 of the Ohio Revised Code, and adult-use operates under Chapter 3780, both administered through the Division of Cannabis Control with the Ohio Department of Taxation handling the tax side. Many Ohio dispensaries hold dual-use certificates and serve registered patients and adult-use customers from the same building, often from overlapping inventory. Cultivators and processors frequently supply both channels from one facility. That structure is convenient operationally and awkward for tax accounting, because federal treatment has never turned on the label a state applies to a sale. It turns on the federal characterization of the substance and of the trade or business. If federal treatment ever diverges between the two channels, or between cannabis activity and non-cannabis activity conducted in the same entity, the operator who cannot separate them in the accounting records will be the one unable to take advantage of the difference.

The Mixed-Use Cannabis Accounting Problem

Consider a Columbus dual-use dispensary with a Chapter 3796 patient base and adult-use retail in the same footprint, sharing one lease, one security contract, one payroll, and one inventory room. Its bank statement does not distinguish medical from adult-use, and neither does its rent invoice. Every shared cost in that business is a question waiting to be asked: on what basis was it assigned, when was that basis chosen, and what records support it. The answer has to exist inside the accounting system in the period the cost was incurred. It cannot be manufactured during an examination, and no allocation percentage is credible if it appeared for the first time on a workpaper prepared after year end. This is the same discipline that dispensary accounting already demands for cost of goods sold, applied to a second dimension.

• Revenue segmentation: medical and adult-use as distinct revenue accounts or classes, tied to point-of-sale channel reporting and to filed excise and sales tax returns.
• Departments and classes: retail, production, delivery, and administration tracked separately so labor and overhead can be traced rather than estimated.
• Direct expenses: costs that belong entirely to one channel coded to that channel at entry, never at close.
• Indirect and shared expenses: rent, utilities, security, insurance, software, and professional services carried in shared pools with a documented driver.
• Payroll: hours tracked by actual activity where the work is genuinely divided, rather than allocated by a flat percentage applied to everyone.
• Inventory and COGS: package-level costing that supports channel reporting without disturbing the existing costing policy.
• Source records: point-of-sale exports, seed-to-sale reports, invoices, and time records retained and reconciled every period.

Cannabis 280E Expense Allocation and Apportionment

Allocation is where a change in federal treatment would create the most accounting work, because the costs that matter most are precisely the ones that are shared. A single Ohio facility may house cultivation, processing, and retail, or may serve both patient and adult-use demand from one staff. Apportioning those costs is an exercise in measurement and documentation, not in argument. The most common drivers are square footage for occupancy costs, actual hours for labor, transaction or unit volume for variable overhead, and direct assignment wherever a cost can be traced to one activity. Each has weaknesses, each must be measured rather than assumed, and none of them guarantees any particular tax result.

• Rent and occupancy: measured square footage by function, with a floor plan retained and updated when the space changes.
• Payroll and management: time records by department and activity, including owner and management time.
• Security: contract scope by area covered, since guard coverage is rarely uniform across a facility.
• Utilities: submetering where it exists, and a documented proxy where it does not.
• Software and subscriptions: assigned by the function each system serves, with seat counts where relevant.
• Insurance and professional services: assigned by the risk or the engagement scope actually covered.
• Shared facilities across entities: intercompany agreements that match what is actually performed and are priced consistently.

Chart of Accounts After Schedule III

A chart of accounts built for a single federal treatment will not answer channel-level questions. The upgrade is structural rather than cosmetic: add the dimensions that let the same ledger produce both a consolidated statement and a segmented one. Most Ohio operators can accomplish this without a migration, using classes, departments, and location tags in their existing system. Our Ohio cannabis accounting guide covers the underlying ledger architecture, and cannabis bookkeeping is where the structure is maintained month to month.

• Separate revenue accounts or classes for medical, adult-use, wholesale, and non-cannabis activity.
• Inventory accounts by stage and by license type, reconciled to the state monitoring system at package level.
• Cost of goods sold mirroring the inventory structure so margin is readable by channel.
• Labor accounts split between capitalizable production labor and period labor, then by department.
• Shared overhead pools that are visibly pools, with the allocation posted as a traceable entry rather than a spreadsheet adjustment.
• Location coding for every multi-site operator, which Ohio municipal net profits filings already require.
• A standing workpaper file per period holding the allocation support, the reconciliations, and the written policy.

Inventory and COGS Still Matter

Whatever happens federally, inventory accounting remains the backbone of a cannabis return. Cost of goods sold reduces gross receipts rather than functioning as a deduction, which is why it survived Section 280E in the first place, and it will continue to determine reported margin, tax basis, and the credibility of every other number on the statements under any future treatment. Producers capitalize a broader set of costs than resellers, and the line between them is drawn by documented costing policy and measured drivers. Operators who spent the last several years building defensible inventory records are the ones best positioned for a change, because a change adds a dimension to their work rather than requiring them to start it. See Metrc reconciliation and the cannabis bookkeeping guide for the mechanics.

Documentation and Audit Defense

A changing federal environment makes clean accounting more important, not less. Periods of transition attract scrutiny, because they invite aggressive positions and produce returns that differ from prior years without an obvious reason. The operator whose records reconcile across systems can explain any position quickly. The operator whose records do not will spend the examination reconstructing rather than explaining.

• Point-of-sale reports by channel, tied to deposits, to revenue accounts, and to filed excise and sales tax returns.
• Seed-to-sale reports reconciled to inventory quantities at package level each period, with variances explained and retained.
• Payroll registers reconciled to the ledger, with time records supporting any labor allocation.
• Vendor invoices and manifests retained and matched to inventory receipts.
• Allocation workpapers showing the driver, the measurement, the period, and the preparer.
• A written accounting and costing policy, dated, with amendments recorded rather than overwritten.
• Period close checklists evidencing that reconciliations were performed when the books were closed.

What Ohio Cannabis Businesses Should Do Now

Nothing on this list requires taking a tax position, and nothing on it is wasted if federal treatment does not change. Each item improves the accuracy of the books under current law while making the business ready to implement guidance quickly if it arrives. Operators in Columbus, Cleveland, and Cincinnati carry an additional reason to get this right: municipal net profits tax follows federal taxable income, so the federal computation drives a local liability as well.

• Keep the books current. A monthly close that actually closes is the prerequisite for everything else.
• Separate meaningful activities now: medical, adult-use, wholesale, and non-cannabis revenue in distinct accounts or classes.
• Reconcile inventory to the state monitoring system every period, at package level, with variances documented.
• Document shared costs with a written driver and the measurement behind it, dated in the period.
• Track payroll by actual activity where the work genuinely divides, rather than by a blanket percentage.
• Preserve source documentation in an organized, retrievable structure rather than in email.
• Review entity structure with your CPA and attorney rather than adopting a marketed workaround.
• Build the forecast on current law, and model the alternative separately so a change can be adopted without rebuilding the model.

Questions Ohio Cannabis Operators Should Ask Their CPA

These questions surface gaps quickly, and the answers are usually more revealing than a discussion of federal policy. If several answers are uncertain, the accounting work comes before any planning conversation. Talk it through on our 280E tax compliance page or schedule a consultation.

• Does Section 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 what driver supports each allocation?
• Is payroll tracked by actual activity where the work is genuinely divided?
• Can inventory and cost of goods sold be substantiated from source records?
• Do point-of-sale, seed-to-sale, and accounting records reconcile for every period?
• What written documentation supports our current accounting treatment?
• What would change in our books if federal guidance is issued, and how quickly could we implement it?
• Are our Ohio excise, sales tax, commercial activity tax, and municipal filings consistent with the ledger?