On April 22, 2026, something happened that cannabis operators have been waiting on for years. The Department of Justice issued a final order rescheduling state-licensed medical cannabis from Schedule I to Schedule III of the Controlled Substances Act. For medical operators, that was enormous news. It meant that Section 280E, the tax provision that has been quietly bleeding cannabis businesses dry for four decades, no longer applies to their operations.
But here’s the catch. Recreational cannabis didn’t move. Adult-use operations are still on Schedule I. Still fully subject to 280E. Still limited to deducting only Cost of Goods Sold while watching rent, payroll, marketing, and so many other ordinary business expenses get disallowed.
So overnight, the cannabis industry split into two very different tax situations. And if you’re one of the operators running both a medical and a recreational license out of the same business, you are now sitting in the most complicated tax position in the entire industry.
The IRS has already signaled that guidance on expense allocation for dual-license operators is coming but that guidance isn’t here yet. And the DEA’s administrative hearing on whether recreational cannabis gets the same treatment began June 29, 2026, with a hard deadline of July 15. The outcome of that hearing will determine whether this becomes a full industry fix or stays a partial one.
In the meantime, if you’re a dual-license operator, you can’t wait. You need to understand what just changed, what it means for your books, and what happens if you don’t set up your accounting structure correctly right now.
What Rescheduling Actually Did (and Didn’t Do)
The April 22 order put two categories of cannabis products into Schedule III: FDA-approved products containing marijuana, and products regulated under a qualifying state medical marijuana license. For operations that fall into those categories, Section 280E no longer applies, and they should now be able to deduct ordinary and necessary business expenses under Section 162, just like any other business.
That’s significant. Marketing, professional services, software, banking fees, all of it becomes deductible for qualifying medical operations.
But the order specifically didn’t reschedule recreational cannabis. It did not legalize cannabis federally. And it did not provide any retroactive relief for prior tax years. In fact, the Treasury has indicated that for calendar-year taxpayers, 280E relief applies starting January 1, 2026 forward, not going back to prior years. Amended returns for prior periods remain governed by the law that was in effect at the time.
So what we have right now is this: medical cannabis operators with a clean, single-purpose structure are in a better position starting in 2026. Recreational-only operators are exactly where they were. And dual-license operators are in a situation the IRS has not yet issued guidance on, which means the decisions they make right now about how to structure and document their expense allocation will determine how defensible their tax position is when the IRS does issue that guidance and eventually comes looking.
The Core Problem for Dual-License Operators
Here’s what makes this hard. Most dual-license cannabis businesses weren’t built to keep medical and recreational completely separate. They share space, employees and management. They might share a dispensary floor, a back office, a POS system, and a payroll provider.
When everything is commingled, splitting the books after the fact is not just inconvenient. It’s an audit risk.
The IRS has a long history of challenging allocation methodologies that produce favorable results for taxpayers. Allocation methodology and activity segregation will continue to be the audit issues going forward for dual-license operators. The IRS has won the vast majority of 280E cases over the last 20 years. It’s not going to walk away from the allocation fight now.
Specifically, the IRS is expected to argue that a single entity running both medical and recreational activities is a single trade or business, with no legitimate basis to allocate expenses between them. In other words, both your medical and recreational sales are still 280E applicable if you hold a dual use license. That argument has teeth if your structure doesn’t reflect genuine operational separation. Paperwork alone won’t save you. The separation has to be documented, and built into how you actually operate day to day.
Three Ways Operators Are Structuring This
Based on what’s getting traction right now in the industry, there are three main approaches dual-license operators are taking. Each has different requirements and different audit risk profiles.
The cleanest approach is complete entity segregation. You create a separate legal entity to hold the medical license, run the medical-only inventory, and book the medical-only revenue and expenses. The adult-use entity handles everything else and stays in 280E compliance. The two entities may share a parent or common ownership, but they operate and account separately. The medical entity registers with the DEA as a Schedule III handler. When an auditor comes in, the separation is visible in the legal structure, the books, the licenses, and the operations. This is the most defensible approach. It’s also the most work to set up correctly. And your window to register a new entity with the DEA closed on June 26th, with no guidance yet as to when additional opportunities will arise.
The second approach is physical space segregation. If your medical and recreational activities happen in distinct spaces, like a separate dispensary floor or separate cultivation rooms, you may be able to run the activity separation without separate legal entities. Where medical and adult-use activity occur in physically distinct space, operators can run the separation through allocated square footage, dedicated staff, and separate inventory systems. But the documentation requirements are significant. You need lease allocations, headcount allocations, time logs, and system-level separation to support the position.
The third approach is allocation within a single entity, which is the riskiest. If you’re trying to allocate shared expenses between medical and recreational activity without a clean operational separation, you need a formal, written allocation methodology with a defensible basis. Revenue split, square footage, headcount hours, whatever the method is, it needs to be documented, consistent, and applied from the start of the period, not constructed after the fact when an audit notice arrives.
Most importantly, the IRS has not yet issued formal guidance on how expense apportionment between medical and recreational activities should work. That guidance is coming. When it does, operators who already have a clean structure and documented methodology will be in a fundamentally different position than those who haven’t started yet.
What This Means for You
If you hold only a medical license with a clean structure, the most important thing you can do right now is work with an accountant who understands the new Schedule III framework and can set up your chart of accounts, COGS methodology, and expense tracking to capture the full benefit of the relief. There are real savings but only if your books are built to support the position.
If you hold only a recreational license, stay the course on 280E compliance. Watch the June 29 hearing. Be ready to move quickly if recreational cannabis follows medical into Schedule III.
And if you hold both licenses, the honest answer is that your books probably need to be restructured. Not because they were wrong. Because they were built for a world where both operations were treated the same, and that world no longer exists.
This is exactly the kind of work we do at High Rock. We understand cannabis, we understand 280E, and we understand what the rescheduling actually means for dual-license operators trying to get their books right in a fast-moving regulatory environment. Reach out to our team.
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