Medical marijuana moved to Schedule III this spring. Adult-use did not. If you hold a recreational-only license, 280E still applies to you in full. So while medical operators step out from under the rule, your returns are still governed by it, and the after-tax money you keep comes down to how you manage it. As Q4 looms, now is the time to start considering how best to optimize your approach. You have three real options. Each lowers your tax a different way, and each carries a different level of risk. Here they are, straight.
Option 1: Move costs into non-plant-touching entities
The first strategy is structural. You set up separate businesses that do not touch the plant. A management company. A staffing company. A real estate company. Those entities carry costs that 280E would block on your dispensary return, things like back-office payroll, HR, rent, and administration. They bill your cannabis business for the service, and because they are not trafficking, they deduct their own expenses like any normal company.
That is the idea. Here is the catch. This works best when you also run cultivation or processing, because a grower gets to fold far more cost into COGS than a rec-only dispensary ever can. If retail is all you do, the upside is smaller, and the structure still takes months of legal and accounting work to stand up.
And there is a trap that the IRS settled in case law. In Alternative Health Care Advocates, the Tax Court ruled that a management company serving a single dispensary was trafficking too, and applied 280E to it right alongside the dispensary. The lesson is plain. A related entity only holds up if it runs a genuine business of its own, charges fair market prices, and ideally serves more than just your cannabis company. Build it as a paper shell only to service the cannabis company and you can lose the deduction on both sides.
Option 2: Use the small-business inventory rules under 471(c)
The second strategy is Section 471(c). It lets a small business use its own books and judgement to decide how it values inventory, and some operators use that room to move more cost into COGS. If you go this way, you must document your approach for the IRS and stay ready to defend it.
To even qualify, you must first pass the gross receipts test in Section 448(c). Here is the short version: You take your average yearly gross receipts across the three years preceding the current one. If that average stays at or under the limit, which is 32 million dollars for 2026 and rises with inflation, you pass. One more thing matters. You cannot split your company into small pieces to slip under the number. The rules make you add related businesses you own or control together when you run the math.
I will be direct about the risk. The IRS position is that a business under 280E cannot use 471(c) to get around it. However, there is no IRS court precedent to solidify this position, and many operators currently take this approach.
If you take the position and lose, you owe the back tax, the interest, and penalties. Such actions can be appealed, but it is not a sure thing and it is no substitute for clean cost accounting.
Option 3: File without applying 280E
The third strategy is the most aggressive. Some operators take the position that 280E does not apply and file, or amend past returns, to claim the deductions anyway. Does it work? The results have been mixed. Some operators received refunds. Some had returns accepted. Trulieve had 112 million dollars returned by the IRS under their non-280E position.
But watch what is happening now. In May 2026 the Justice Department sued TerrAscend to claw back an 8.3 million dollar refund from an amended 2020 return, plus interest. It is the first known clawback of a refund received by cannabis company under a non-280E approach. The IRS has said since 2024 that these refund claims are not valid, and the medical reschedule only reaches forward, not back. So a refund in hand is not the end of the story. The government can come back years later and demand it, with interest running the whole time.
If you are weighing this one, treat it as a future litigation expectation, not tax planning. Price it that way, and get tax counsel before you spend a dollar of any refund.
So which one fits you? For most rec-only operators, the honest answer is that clean, defensible COGS work comes first, and the entity structure is the next step once you add production. The 471(c) method and the non-280E position are real, but they are bets, and the person holding the risk is you.
This is the first piece in a three-part series. Next, I break down exactly which costs you can and cannot move into COGS, and why a grower and a dispensary play by different rules.
Melissa Diaz, CPA
Co-Owner & Partner, High Rock Accounting
Reach out to High Rock Accounting to determine the best tax approach for your cannabis business before it’s too late.
High Rock Accounting delivers outsourced accounting, tax strategy, and fractional CFO services to cannabis operators. Melissa is a 2026 Forbes Best-in-State CPA.
Weighing a 280E strategy before your next filing? Start here: highrock.co/contact
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