280E Tax Reform: April 2026 Rule, Refunds, and State Decoupling

Section 280E tax reform for cannabis businesses arrived on April 28, 2026, when the DEA published a final rule moving state-licensed medical marijuana and FDA-approved marijuana products from Schedule I to Schedule III.¹ Because 280E only reaches Schedule I and Schedule II substances, qualifying medical cannabis operators can deduct ordinary business expenses starting with the 2026 tax year. Recreational cannabis businesses are not covered by the rule and remain fully subject to 280E.

What 280E Does to Cannabis Businesses

Section 280E of the Internal Revenue Code blocks any deduction or credit for expenses tied to a business that traffics in Schedule I or Schedule II controlled substances.² While marijuana sat on Schedule I, the IRS treated every state-licensed cannabis operator as a drug trafficker for tax purposes, no matter how compliant with state law.

The practical effect is severe. Rent, wages, utilities, marketing, insurance, equipment repairs, office supplies: none of it is deductible. Businesses pay those bills with after-tax dollars. Effective federal tax rates routinely land between 70 and 100 percent of a company’s actual earnings, and a cannabis retailer can post a net operating loss on paper while still owing a six-figure federal tax bill because the IRS is taxing gross profit rather than real profit.

The one narrow relief has always been cost of goods sold. COGS is an adjustment to gross receipts rather than a deduction, so 280E does not bar it.³ Cultivators can capture direct production costs and some indirect costs under Section 263A; retailers are essentially limited to wholesale inventory cost plus transportation. Beyond that, the deduction door has been closed.

What the April 2026 Rule Actually Changed

The DEA’s final order moves two specific categories to Schedule III: FDA-approved drug products containing marijuana, and marijuana handled under a state-issued medical marijuana license.¹ Anything else stays on Schedule I.

Treasury announced that the tax relief is prospective. For calendar-year filers, 280E stops applying for the full 2026 tax year.⁴ Qualifying medical cannabis operators can deduct rent, payroll, marketing, insurance, and every other ordinary and necessary business expense on their 2026 returns, on the same terms as a pharmacy or any other Schedule III handler.

The Justice Department also announced an expedited administrative hearing process beginning June 29, 2026, to consider broader rescheduling.⁵ If that process moves forward, the same 280E relief could eventually reach adult-use businesses.

Who Is Still Subject to 280E

Purely recreational cannabis businesses are still classified as trafficking in a Schedule I substance for federal tax purposes, and 280E still applies to them in full.¹ For those operators, nothing about the April 2026 rule changes the tax picture.

Vertically integrated companies and dispensaries that serve both medical and adult-use customers face a harder problem. The IRS will expect strict segregation of expenses between Schedule III medical operations and Schedule I recreational operations. Revenue and costs tied to medical sales qualify for standard deductions; revenue and costs tied to recreational sales do not. Commingled books put the entire operation at risk of being treated as Schedule I trafficking. The recordkeeping burden for dual-license operators is now significantly heavier.

One boundary worth stating plainly: rescheduling did not legalize marijuana under federal law. State-licensed businesses still operate in tension with federal drug statutes. What the reform changed is the tax treatment, not the underlying legal status of the substance.⁶

Can You Recover Taxes Paid Under 280E in Prior Years

Under current guidance, no. The Treasury Department’s transition rule applies only from the 2026 tax year forward, and the announcement was silent on retroactive relief.⁴

The IRS took the same position in advance. In June 2024, it published an information release stating that taxpayers seeking refunds related to 280E by filing amended returns are not entitled to a refund or payment. The reasoning is that in prior tax years, marijuana was actually classified as Schedule I, so the statutory requirements of 280E were met for those periods. Rescheduling today does not rewrite what the substance was in 2023 or 2024.

The DEA’s final order did include a recommendation encouraging the Treasury Secretary to consider retrospective relief for state-licensed medical operators, but the DEA acknowledged it has no authority over tax matters.¹ Whether Treasury acts on that suggestion is unresolved, and operators should not build financial plans around a refund that may never come.

State Taxes and Decoupling

Federal relief does not automatically flow through to state returns. Many states calculate income tax starting from federal taxable income, which means 280E’s inflated tax base has historically cascaded into state liability as well.

As of early 2026, roughly 28 states and Washington, D.C., have enacted some form of 280E decoupling that lets cannabis businesses claim standard deductions on state returns even when the federal return blocks them. Colorado moved first in 2014, and the pace picked up between 2022 and 2025. Scope varies. Some states allow the deduction for both corporate and personal income tax, which reaches pass-through entities like LLCs and S-corporations. Others limit relief to C-corporations.

Mechanics matter too. Some states use a static tax code that does not automatically adopt federal changes, so the legislature had to pass decoupling affirmatively. If your state has not decoupled, you may still be paying an inflated state bill on top of whatever the federal picture looks like, and confirming your state’s specific conformity rules is the first thing to check.

Legislation That Would Finish the Job

Rescheduling solved 280E for medical cannabis. Recreational operators need a legislative fix. Congress has introduced bills in multiple sessions aimed at pulling cannabis out of 280E entirely. The most prominent is the Small Business Tax Equity Act, which would amend 280E to exempt any marijuana business operating in compliance with state law from the deduction ban.⁷ The bill goes at the tax code directly rather than through drug scheduling, adding language that state-authorized cannabis commerce cannot be penalized under 280E regardless of the substance’s federal classification.

A statutory fix has one clear advantage over administrative rescheduling: permanence. Scheduling decisions can shift with a new administration. An amendment to the Internal Revenue Code would lock in tax parity. These bills would allow deductions for all ordinary and necessary business expenses, putting cannabis operators on the same footing as any other legal business.

No version has reached a floor vote in either chamber. Bills have been introduced across multiple consecutive Congresses without advancing past committee. The 2026 partial rescheduling may shift the politics, because the remaining gap is narrower and easier to frame as a tax equity question rather than a legalization vote.

What Net Income Looks Like After Reform

The financial gap between operating under 280E and operating without it is large. Under 280E, the IRS taxes gross profit: revenue minus COGS, with operating costs invisible to the calculation. A business with $2 million in revenue, $800,000 in COGS, and $1 million in operating expenses owes federal tax on $1.2 million in gross profit despite earning only $200,000 in actual profit.

After reform, the accounting is standard. Revenue minus COGS minus ordinary business expenses gives you net income, and that $200,000 is what gets taxed. For C-corporations, the federal rate is a flat 21 percent under the Tax Cuts and Jobs Act.² Pass-through entities flow income to owners’ individual returns at ordinary rates.

For medical cannabis operators, that shift is real for the 2026 tax year. Effective tax rates drop from the 70-to-100 percent range down to rates comparable to any other industry, and cash that previously went to the IRS can be redirected to staff, facilities, or inventory. Recreational operators still waiting for relief should be building clean accounting systems now, categorizing and documenting expenses as if deductions were available, so the books are ready to file correctly the moment reform reaches them.

1
Federal Register. Schedules of Controlled Substances: Rescheduling of FDA-Approved Products
2
Office of the Law Revision Counsel. 26 USC 280E – Expenditures in Connection With the Illegal Sale of Drugs
3
Congress.gov. The Application of Internal Revenue Code Section 280E to Marijuana Businesses: Selected Legal Issues
4
U.S. Department of the Treasury. Treasury, IRS Announce Process for Tax Guidance Following DOJ Rescheduling
5
U.S. Department of Justice. Justice Department Places FDA-Approved Marijuana Products and Products Containing Marijuana Subject to a State Medical Marijuana License in Schedule III
6
Congress.gov. Legal Consequences of Rescheduling Marijuana
7
Congress.gov. HR 2643 – Small Business Tax Equity Act of 2023