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

Does 280E Still Apply in 2026?

Treat 280E as applicable until your own facts and current federal law say otherwise, and document your positions accordingly. Section 280E disallows deductions and credits for a trade or business trafficking in a Schedule I or Schedule II controlled substance. Any change in a substance's federal schedule is therefore relevant to the provision by its own terms, but relevance is not the same as resolution: effective dates, transition treatment, amended-return posture, and the mechanics of allocating expenses across activities are the kinds of details that Treasury and the IRS would need to address before a business can rely on a changed treatment. As of this writing those details are unresolved, and no part of this guide should be read as telling you that 280E has disappeared. If you want the mechanics of the provision itself, our Section 280E explainer covers the statutory language and the cost-of-goods-sold distinction in plain terms.

• Established: cost of goods sold reduces gross receipts and is not a deduction, so inventory accounting governs what is recoverable
• Changed: rescheduling has moved from hypothetical to actively debated, and operators are asking planning questions that did not exist a few years ago
• Unresolved: how, when, and to what periods any change applies, and how mixed medical and adult-use activity would be characterized
• Practical: an operator who cannot substantiate costs today gains nothing from a favorable federal change tomorrow

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

Michigan runs two licensing frameworks side by side. The Medical Marihuana Facilities Licensing Act supports provisioning centers serving registered patients and caregivers, and the Michigan Regulation and Taxation of Marihuana Act supports adult-use retailers, growers, processors, secure transporters, and safety compliance facilities. The Cannabis Regulatory Agency oversees both, and a large share of Michigan operators hold licenses on both sides at the same address. State tax treatment already differs: adult-use retail sales carry the 10 percent excise tax in addition to the 6 percent sales tax, while medical sales are taxed differently. That split already exists in your point-of-sale system and your Metrc packages. Federal tax treatment has not tracked it, and 280E has historically applied without regard to which state program a sale ran through. If federal treatment ever diverges between activity types, the operators able to act on it will be the ones whose books already separate the two cleanly.

The Mixed-Use Cannabis Accounting Problem

Consider a Michigan operator with a provisioning center and an adult-use retail license operating from one building, plus a Class C grow feeding both. One security contract. One general manager. One rent payment. One utility bill. Two revenue streams that the state treats differently and that federal law may or may not eventually treat differently. If a federal change ever makes activity-level characterization matter, that operator faces a records problem, not a tax-planning problem, and records problems cannot be solved retroactively with any credibility. The fix is ordinary accounting discipline applied earlier than feels necessary: revenue segmented by program and channel, departments or classes for medical retail, adult-use retail, cultivation, and administration, direct costs coded to the activity that consumed them, and shared costs captured with a driver that is measured rather than assumed. No allocation methodology has been blessed by the IRS for this purpose, and this guide does not propose one; what it proposes is that your system be capable of producing one, with support, whenever it is needed.

• Revenue segmentation by program (medical vs. adult-use), channel, and location at the point-of-sale layer, not by journal entry at month end
• A chart of accounts with departments or classes that mirror how the business actually operates
• Direct expenses coded at entry: cultivation labor, packaging, testing, and product costs to the activity that consumed them
• Indirect and shared expenses identified as shared, with the driver documented: square footage, headcount, hours, transaction counts, or units produced
• Payroll captured by function and, where practical, by activity, so labor is not the weakest line in any future allocation
• Rent, utilities, security, software, insurance, and professional fees flagged as shared with the basis recorded contemporaneously
• Inventory and COGS maintained under a written costing policy tied to source documents
• Point-of-sale, Metrc, and general ledger reconciled monthly so all three tell the same story

Cannabis 280E Expense Allocation and Apportionment

Shared expenses are where a theoretical federal change becomes an accounting project. Rent for a building housing medical retail, adult-use retail, and a grow. A general manager whose time crosses all three. A security contract that covers the vault, the sales floor, and the flower rooms. Utilities on a single meter. Seed-to-sale software, insurance, and professional services billed at the entity level. Each of these requires a basis before it can be split, and the credibility of the split depends entirely on whether the basis was measured when the cost was incurred or estimated afterward. Contemporaneous documentation means a square-footage schedule tied to a floor plan, timesheets that record function, a written allocation policy approved by management, and workpapers that reconcile the allocated amounts back to the trial balance. Nothing here promises deductibility for any expense. It makes your position explainable, which is the part you control. If you want this built rather than described, our 280E tax compliance service exists for exactly that work.

Chart of Accounts After Schedule III

The structural changes worth making now are the ones that are useful under current law and become essential under a changed one. Separate medical and adult-use revenue accounts. Separate inventory and COGS by license type and stage. Split payroll between production labor and everything else, with production labor further separated by department. Isolate shared overhead in accounts that are visibly shared rather than buried in a general operating expense line. Use classes or departments for medical retail, adult-use retail, cultivation, processing, and administration, and use locations where you operate more than one site. Then close on a schedule that produces reconciliations and workpapers as output, not as an afterthought. Our Michigan cannabis accounting guide walks through the ledger architecture in detail, and cannabis bookkeeping covers the monthly discipline that keeps it accurate.

• Revenue: medical retail, adult-use retail, wholesale, and other, each by location
• Inventory: raw material, work in process, finished goods, and packaging, by license type
• COGS: separated by stage and department so absorption is traceable
• Labor: production labor by department, non-production labor separately
• Shared overhead: rent, utilities, security, software, insurance, and professional fees in identifiable shared accounts
• Supporting layer: monthly reconciliations, allocation workpapers, and a written accounting policy memo

Inventory and COGS Still Matter

Every scenario for the federal treatment of cannabis income runs through inventory. Under 280E, cost of goods sold is what survives disallowance. Under any changed regime, inventory and cost accounting still determine taxable income, still drive gross margin, and still get examined. An operator whose inventory does not reconcile to Metrc, whose costing policy is undocumented, or whose absorption is a spreadsheet reconstructed in March has an exposure that no federal development repairs. Monthly physical counts tied to package-level records, a written absorption policy, variance analysis with explanations, and a clean roll-forward from opening inventory to closing inventory are the baseline. Our Metrc reconciliation service and the Metrc guide cover the tie-out method, and dispensary accounting addresses the retail side where point-of-sale data is the primary source record.

Documentation and Audit Defense

A changing federal environment makes clean accounting more important, not less. Periods of transition invite aggressive positions, aggressive positions invite examination, and examination is a documentation contest. Assume that any position you take in 2026 will be reviewed by someone with access to your Metrc history, your point-of-sale exports, and your bank records, and build the file accordingly. Audit preparation and audit representation go deeper on how these files are assembled and defended.

• Point-of-sale reports by day, channel, and program, reconciled to deposits and to revenue accounts
• Metrc package and transfer records tied to receipts, production batches, and sales
• Payroll registers with function or department detail and supporting time records
• Vendor invoices and contracts for rent, security, utilities, software, and professional services
• Inventory counts, valuation schedules, and roll-forwards with variance explanations
• Allocation workpapers showing the driver, the measurement, the calculation, and the tie to the trial balance
• A written accounting policy memo covering costing method, allocation basis, and revenue segmentation

What Michigan Cannabis Businesses Should Do Now

Nothing on this list requires taking a federal tax position, and every item on it is defensible under current law. Michigan operators have an advantage here: the state already forces medical and adult-use separation through licensing, Metrc, excise reporting, and Department of Treasury filings. Extend that separation into the general ledger and you are prepared for a range of federal outcomes without betting on any of them. Work with your CPA on the sequence, and reassess when actual Treasury or IRS guidance is issued rather than when commentary predicts it.

• Keep the books current: a closed month within fifteen days, every month, with reconciliations attached
• Separate medical and adult-use activity in the ledger, not only in the point-of-sale system
• Reconcile Metrc, point-of-sale, and the general ledger monthly and keep the exception log
• Document how shared costs are measured before you need to explain how they were split
• Track payroll by function and department so labor allocation is supported by records rather than judgment
• Preserve source documentation in an organized, retrievable structure with defined retention
• Write the accounting policy memo now and update it when facts change
• Model the effect of alternative federal outcomes on cash and tax reserves without changing filings on speculation
• Be ready to implement future guidance quickly, which mostly means having clean data to apply it to

Questions Michigan Cannabis Operators Should Ask Their CPA

Bring these to your next planning meeting. The answers reveal whether your accounting system is ready for a federal change or merely current on filings. If several answers are uncertain, that is a scoping conversation, and it is the one we have most often with dual-licensed Michigan operators.

• Does 280E currently apply to all of our activity, and how is that conclusion documented?
• Can our accounting system distinguish medical from adult-use activity at the revenue, inventory, and COGS level?
• How are shared expenses tracked today, and what driver supports each allocation?
• Is payroll tracked by actual function and activity, or allocated by estimate at period end?
• Can inventory and COGS be substantiated from source documents for any month we are asked about?
• Do point-of-sale, Metrc, and accounting records reconcile, and where do they routinely disagree?
• What documentation supports our current accounting treatment if it is examined?
• What accounting changes would be necessary if additional federal guidance is issued mid-year?

Talk Through Your 280E Position

If you are a Michigan operator trying to decide what to do about 280E in 2026, the productive conversation is about your records rather than about federal predictions. Our 280E tax compliance and cannabis tax preparation services address costing methodology, allocation documentation, and return positions together, with support across Michigan markets including Detroit, Grand Rapids, Ann Arbor, and Lansing.