Dual-Entity Structures After Schedule III: Do You Still Need Them?

This is one of the most common questions I’ve been getting from cannabis operators since medical rescheduling. And the honest answer is: it depends on who you are and what you do, which takes some unpacking.

Here’s the short version first. Dual-entity structures were built to solve a specific problem, IRS Section 280E. If 280E doesn’t apply to you anymore, the primary reason those structures existed has changed. But “changed” and “no longer matters” are two different things. And right now, the operators who are unilaterally unwinding these structures because they heard 280E is gone are making a mistake that could be expensive to fix.

Let me walk through where we actually are, why the answer is different depending on your license type, and what you should actually be doing with your entity structure right now.

What Happened to Get to Where We are

There’s been a lot of noise about what the DOJ rescheduling order means. Let me be precise about what it actually did, because the details are what determine whether any of this applies to your business.

On April 23, 2026, Acting Attorney General Todd Blanche issued a final order placing two specific categories of cannabis into Schedule III of the Controlled Substances Act: FDA-approved products containing marijuana, and marijuana products regulated under a qualifying state-issued medical marijuana license. The Federal Register made the effective date April 28, 2026.

Because 280E applies only to trafficking in Schedule I and Schedule II substances, state-licensed medical operators whose products now sit in Schedule III are no longer subject to the ordinary deduction disallowance. They can now deduct rent, payroll, marketing, and other ordinary business expenses the way any non-cannabis business does. For calendar-year taxpayers, the Treasury and IRS have confirmed that relief applies from January 1, 2026 forward.

For a mid-sized medical dispensary, industry analysis suggests annual savings of roughly $268,000 per location, with higher-volume stores seeing relief closer to $800,000. At the industry level, removing 280E for qualifying operators could unlock $1.6 to $2.2 billion in incremental after-tax cash flow annually.

But here’s what the order did not do. Adult-use cannabis did not move. Recreational operations are still on Schedule I. 280E still applies. And the broader rescheduling question for recreational cannabis is working its way through a separate DEA administrative hearing that started June 29, 2026, with a hard deadline of July 15. That outcome remains uncertain.

So before you touch your entity structure, you need to know which bucket you’re in.

The Three Buckets

Every cannabis operator right now sits in one of three places, and your bucket determines everything about whether your dual-entity structure still makes sense.

Medical-only operators with a clean single-license structure. If your business operates exclusively under a qualifying state medical marijuana license, you are the primary beneficiary of the April 23 order. 280E is no longer your problem. The structures you built to manage 280E exposure are worth revisiting, and many of them may be simplified. But simplified carefully and deliberately, not quickly. Operators in medical only states still need to plan for a post-recreational world where adult-use initiatives are working their way through the state legislature.

Recreational-only operators. Nothing has changed for you. 280E still applies in full. Your dual-entity structure, if you have one, is still doing the job it was designed to do. Hold it until the June 29 hearing produces a clear outcome and the IRS issues formal guidance on what happens next.

Dual-license operators running both medical and recreational. This is the most complicated situation in the entire industry right now, and it’s where the question of dual-entity structures is most live. The critical caveat is that adult-use and recreational marijuana remain Schedule I, leaving 280E fully in effect for those operations and creating immediate cost allocation complexity for dual-license multi-state operators. If your medical and recreational operations are commingled in a single entity, you have a problem that got more complicated on April 23, not less.

Why Dual-Entity Structures Were Built in the First Place

It’s worth being clear about what these structures were actually doing, because that’s the only way to evaluate whether they’re still needed.

The classic dual-entity structure in cannabis separated the plant-touching operations (dispensary, cultivation, processing) from the management and service functions (real estate, intellectual property, management fees, payroll services). The goal was to concentrate deductible COGS in the plant-touching entities while sheltering as many non-plant-touching expenses as possible from 280E’s reach by housing them in a separate entity that could claim them as ordinary deductions.

This structure had real value under 280E. For a typical mid-size MSO, the move from a pro rata allocation to a clean entity-segregation structure could mean the difference between $4 million and $9 million of deductible operating expense in a single year. The tax savings justified the administrative cost and complexity of running multiple entities, maintaining intercompany agreements, and managing consolidated financial reporting.

Now, for a medical-only operator, the primary reason for that separation has changed. The management company doesn’t need to exist to shelter expenses from 280E anymore, because 280E doesn’t apply. But that doesn’t mean the structure should be collapsed tomorrow.

Why You Shouldn’t Just Unwind It

Here’s the part that matters most. Unwinding entities can trigger tax, regulatory, and licensing consequences that are material, expensive, and often underappreciated until after the fact.

The entity structure doesn’t exist in isolation. It touches your state licenses, your banking relationships, your real estate leases, your vendor agreements, and in some cases your debt covenants. Collapsing a management entity into a plant-touching entity isn’t just an accounting journal entry, it’s a restructuring event that may require regulatory notification or approval in your state, consent from lenders, and careful tax planning to avoid triggering gain recognition on assets that have moved between entities.

There’s also a litigation risk that almost nobody is talking about. The legal authority the DOJ relied on for the April 23 order has not been tested in this context. A drug-testing trade group and a pharmaceutical company have already asked a federal appeals court to freeze the rescheduling. If a court enjoins the order, operators who restructured or changed their tax positions in reliance on it could face real exposure. Unwinding a structure that took years to build, only to need it again in six months if the order gets challenged, is not a scenario anyone wants to live through.

What Dual-License Operators Need to Do

For operators running both medical and recreational licenses, the structural question isn’t whether to unwind. It’s whether your current structure is built for the post-April-23 world, which is different from the world it was designed for.

Before the rescheduling order, both sides of a dual-license operation were subject to 280E. The management company structure sheltered expenses from both. After the order, the medical side is out of 280E and the recreational side is still in it. That means your expense allocation methodology, your intercompany agreements, and your entity-level tax reporting all need to reflect a bifurcation that didn’t exist before.

If your medical and recreational operations are legally separated into distinct entities, this is manageable. Dispensaries operating exclusively under a state medical marijuana license, and cultivators and processors whose products feed only into the medical supply chain, are the ones who clearly benefit from 280E relief. If those operations are properly segregated at the entity level, you can run the medical entity without 280E constraints and maintain 280E-compliant accounting on the recreational side.

If your dual-license operations are comingled in a single entity, or in a structure where costs are allocated between medical and recreational without clean legal separation, you have a more difficult problem. As Treasury and IRS have made clear, Section 280E is not gone entirely, it is being removed only for certain qualifying medical cannabis products that have been placed in Schedule III. Until further guidance arrives, a single entity running both medical and recreational activities under the same license is in an ambiguous position that carries real audit risk.

State Conformity Is Its Own Problem

Here’s a layer most operators aren’t thinking about. The federal change doesn’t automatically flow through to state taxes. Some states explicitly decoupled from Section 280E years ago, California, Massachusetts, New York, Illinois, and Oregon, among others, meaning state-level deductions have been available even while federal 280E applied. Those states won’t see any change in their treatment because they were already past 280E at the state level.

Other states that do conform to the federal code will need to be analyzed individually for how they’ll treat the partial federal reclassification. Static conformity states may not automatically pick up the Schedule III change. Rolling conformity states likely will. And some states may legislate their own rules independent of what the federal code says.

What this means practically is that your entity structure may still matter enormously for state tax purposes even in states where the federal 280E relief applies. Before you simplify anything, you need a state-by-state conformity analysis for every state where you operate.

What to Do Right Now

If you’re a medical-only operator with a clean license structure, work with your accountant now to understand what your current entity structure was doing for you, whether those functions still need to be legally separated, and whether simplification is warranted. Do this thoughtfully. Map the tax consequences, the licensing implications, and the contractual considerations before you move anything.

If you’re a recreational-only operator, hold your structure and watch the June 29 hearing outcome. The IRS guidance that follows should help define the best path forward.

If you’re a dual-license operator, the most urgent thing is to make sure your medical and recreational operations are clearly separated in a way that’s legally defensible and reflects distinct operations. Trying to claim 280E relief on a portion of a commingled entity without clean structural separation is the IRS fight you don’t want to have. Get ahead of it now.

And regardless of your structure, the books need to reflect reality. Your entity-level financials, intercompany allocations, and expense categorizations need to tell a story that holds up to external review. In this environment, that’s not optional. The IRS is paying attention to cannabis, and the partial rescheduling has given them a new set of questions to ask.