By Daniel Sabet · Cannabis CFO & Financial Advisor, GreenGrowth CPAs · 280E, Tax Strategy & Growth Planning · Los Angeles, CA | Published August 5, 2026 | Cannabis Advisory
280E expense allocation is now the single hardest call on a dual-licence cannabis return, and the IRS has not answered it. Medical cannabis moved to Schedule III in April 2026. Adult-use did not. So one set of your expenses became deductible and the other did not, inside the same building, often paid by the same staff on the same day. Treasury has said guidance on how to split them is coming. Your return is due September 15. Those two facts do not line up, and every dual-licence operator has to decide what to file in the meantime.
QUICK ANSWER
280E expense allocation is the process of splitting shared costs between rescheduled medical activity, where deductions are now available, and adult-use activity, which stays under Section 280E. No IRS default method exists yet. Operators generally choose between separate legal entities, direct tracing, square footage, or gross receipts pro rata. The bigger risk sits one level up. The IRS is expected to argue that a single company running both lines is one trade or business, with no basis to allocate at all. That makes how you structure and document the split more important than which percentage you land on.
280E Expense Allocation: At a Glance
What Dual-Licence Operators Need to Know Before September
- The split is real: The April 2026 order covers state-licensed medical cannabis and FDA-approved marijuana products. Adult-use, unlicensed activity and synthetic THC all stay in Schedule I and stay under 280E.
- No default method exists: Treasury has said guidance will address businesses running both rescheduled and non-rescheduled activities. Until it lands, you pick a method and defend it.
- The trade-or-business question comes first: Before any percentage matters, you have to show two separate trades or businesses rather than one. That argument won the only significant taxpayer victory in 280E history.
- Separate entities are the cleanest answer: Distinct legal entities with distinct books, staff and leases remove most of the argument. Square footage and gross receipts pro rata invite more scrutiny.
- Documentation beats precision: A 280E expense allocation applied consistently and disclosed on the return protects you better than a more favourable method you cannot evidence.
- The transition rule is generous but unfinished: Treasury has signalled full-taxable-year treatment for rescheduled activity. That signal is not published guidance yet.
- GreenGrowth’s role: We build and document 280E allocation methodologies for dual-licence operators. Book a 280E allocation review →
What the April 2026 Order Actually Changed
The Department of Justice final order moved two categories into Schedule III. FDA-approved products containing marijuana moved. So did products regulated under a qualifying state medical marijuana licence. For activity in those categories, Section 280E stops barring deductions, and ordinary business expenses fall back under Section 162 like any other company.
Adult-use cannabis did not move. It sits in Schedule I, and 280E applies to it in full. That single fact created the entire allocation problem. A medical-only operator got relief. An adult-use-only operator got nothing. Everyone holding both licences got a question instead of an answer.
The Transition Rule Treasury Has Signalled
Treasury has indicated that rescheduling will generally apply for a business’s full taxable year that includes the effective date, rather than only from April onward. For a calendar-year taxpayer, that treats qualifying medical activity as outside 280E for all of 2026. Read plainly, it is a generous position.
Two limits deserve attention. First, the transition rule does not give full retroactive relief for closed prior years. The order encouraged Treasury to consider retrospective relief, but encouragement is not a mandate. Second, it does not reach adult-use activity, non-qualifying products or unlicensed activity. Those stay exactly where they were.
💬 The Conversation Worth Having
Most operators ask us which allocation percentage the IRS will accept. That is the wrong first question. The IRS does not have to argue about your percentage if it can argue you never had two businesses to allocate between. One entity, one licence stack, one payroll, one lease, one point-of-sale system, one bank account. Under that structure, the percentage is the second fight. The first one is whether you get to allocate at all, and you win or lose it on structure and records, not on arithmetic.
Filing by September 15 and unsure which position to take? One review settles it.
280E Expense Allocation Starts With Two Trades or Businesses
Section 280E denies deductions for a trade or business that traffics in a controlled substance. The words “trade or business” carry the whole argument. If your medical and adult-use operations form one trade or business, 280E reaches everything. If they form two, only one falls inside it.
Cannabis taxpayers have lost the overwhelming majority of 280E cases. The one meaningful exception turned on exactly this point. A California operator ran a caregiving and counselling service alongside cannabis distribution, and the court accepted them as two separate trades or businesses with expenses allocated between them. Later cases narrowed that opening considerably, so the second activity has to be genuinely distinct in substance, not just labelled differently.
What the IRS Is Expected to Argue
Expect the IRS to treat a single company selling both medical and adult-use product as one trade or business, with no 280E expense allocation available at all. Same inventory. Same staff. Same premises. Same customers walking through the same door. On those facts, the agency will say no legitimate basis exists to split anything, and it will point to a long run of wins to support the position. Any operator planning to allocate should build the file that answers that argument before it arrives.
Four 280E Expense Allocation Methods Compared
Once you clear the trade-or-business hurdle, four 280E expense allocation approaches dominate practice. They differ sharply in how much scrutiny they attract and how much operational change they demand.
▶ Allocation Methods by Defensibility
| Method | How It Works | Defensibility | Cost to Implement |
|---|---|---|---|
| Separate legal entities | Distinct entities, books, staff, leases and licences for each line | Strongest | High: restructuring plus regulator approval |
| Direct tracing | Each cost tagged to a line at the transaction level, with shared costs traced by driver | Strong | Medium: chart of accounts and POS tagging |
| Square footage | Occupancy costs split by dedicated floor area per activity | Moderate, and only for space costs | Low: floor plans and measurements |
| Gross receipts pro rata | All shared costs split by each line’s share of revenue | Weakest, high scrutiny | Lowest: one ratio |
No IRS default method has been published. Treat this table as a framework for discussion with your advisor, not as guidance.
Why Gross Receipts Pro Rata Looks Easy and Is Not
As a 280E expense allocation method, splitting every shared cost by revenue share takes an afternoon. That is exactly the problem. The method assumes each dollar of revenue consumes the same resources, and in a dispensary that assumption rarely holds. Medical patients often buy larger baskets with less staff time. So a revenue split can overstate the cost attributable to the medical line, or understate it, and you have no evidence either way. When the IRS asks why this ratio reflects economic reality, you need an answer beyond convenience.
What Your 280E Expense Allocation File Should Contain
A 280E expense allocation you cannot evidence is one you will lose. Build the file while the year is running, because reconstructing it after an examination notice arrives rarely goes well.
A written methodology memo. State the method, the driver behind it, why it reflects how the business actually operates, and the date you adopted it. Review it annually and keep prior versions.
Transaction-level sales data by licence type. Your point-of-sale system already records whether a sale ran under a medical or adult-use transaction. Export it, keep it, and reconcile it to the general ledger monthly.
Time records for shared staff. If a budtender serves both lines, you need hours by activity rather than an estimate. Without records, the conservative treatment applies to that entire payroll cost.
Floor plans with dated measurements. Square footage claims need evidence of which areas served which activity, and when that changed during the year.
Return disclosure. Because no guidance exists, disclosing the position and the method you used matters. Discuss the appropriate disclosure with your preparer before filing.
Prior Years and Amended Returns
The retroactive question carries the largest dollars in the industry, and it remains open. The April order encouraged Treasury to consider retrospective relief for years when a business operated under a state medical licence. Treasury has not committed to it. Several large operators have already claimed refunds on prior years, and at least one now faces litigation from the IRS over a refund the agency says was issued in error.
So amending prior returns is a decision with real downside as well as upside. Take it deliberately, with advice, and with a clear view of your cash position if a refund later reverses. We cover this in more depth in a separate piece on amended 280E returns.
How GreenGrowth CPAs Approaches 280E Expense Allocation
We have worked with cannabis operators since 2016, through every phase of 280E from the Harborside line of cases to this transition. Our 280E expense allocation work follows three steps. First, we assess whether your current structure supports a two-trade-or-business position at all. Second, we select and document a method that fits how the business actually runs. Third, we build the evidence file, covering the methodology memo, the data exports and the reconciliations.
Where Most Operators Are Exposed
In 280E expense allocation work, the gap is almost never the method. It is the data. Operators run a consolidated ledger because nothing forced them to do otherwise, so the sales detail sits in the point-of-sale system while the books never see it. Closing that gap takes weeks, not months, but it takes them before you file rather than after. For the tax side of this work, see our tax planning and compliance services and our cannabis accounting practice.
KEY TAKEAWAYS
- ›The April 2026 order rescheduled state-licensed medical cannabis only. Adult-use activity stays in Schedule I and stays fully under Section 280E.
- ›Treasury has said allocation guidance is coming for businesses running both rescheduled and non-rescheduled activity. It has not published that guidance yet.
- ›The threshold question is whether you run two trades or businesses. If the IRS establishes one, no allocation percentage saves the deduction.
- ›Separate legal entities give the strongest position. Direct tracing follows. Square footage works for space costs only, and gross receipts pro rata draws the most scrutiny.
- ›Do not adopt a method you cannot defend if the IRS later prescribes a different default. Consistency and evidence matter more than the percentage you reach.
- ›Prior-year amended returns carry real risk. Treasury has not committed to retroactive relief, and refund claims have already drawn IRS challenge.
280E Expense Allocation Questions Answered
The Rules Today
What is 280E expense allocation?+
280E expense allocation is the process of splitting shared business costs between cannabis activity that Section 280E still covers and activity it no longer covers. After the April 2026 rescheduling order, that means splitting costs between adult-use operations, which remain under 280E, and state-licensed medical operations, which do not.
Has the IRS published an allocation method for dual-licence operators?+
No. Treasury has stated that forthcoming guidance is expected to address how Section 280E applies to businesses with multiple activities, including activities that remain subject to it and activities that do not. That guidance has not been published. Until it is, operators choose a method and document why it fits their business.
Does the transition rule cover the whole 2026 tax year?+
Treasury has signalled that rescheduling will generally first apply for a business’s full taxable year that includes the effective date of the final order. For a calendar-year taxpayer, that would treat qualifying medical activity as outside Section 280E for all of 2026 rather than only from April onward. This remains a signalled position rather than published guidance.
Choosing and Defending a Method
Which allocation method is most defensible?+
Separate legal entities give the strongest position, because distinct entities with distinct books, staff and leases remove most of the argument that the operations form one trade or business. Direct tracing at transaction level comes next. Square footage works for occupancy costs but not for payroll or overhead. Gross receipts pro rata is the simplest and attracts the most scrutiny.
Do we need separate legal entities for medical and adult-use?+
Separate entities are not required, but they produce the cleanest position. The obstacle is usually regulatory rather than tax. Cannabis licences are not freely transferable, so a restructuring needs state approval and can take months. Weigh the tax benefit against that timeline and cost before committing.
What records support a 280E allocation in an audit?+
Five things carry most of the weight. A written methodology memo stating the method and why it fits. Transaction-level sales data by licence type, exported from the point-of-sale system and reconciled to the ledger monthly. Time records for staff who serve both lines. Dated floor plans if you use square footage. Return disclosure of the position taken.
Prior Years and Amended Returns
Should we amend prior-year returns to claim 280E refunds?+
Not without advice. The April 2026 order encouraged Treasury to consider retrospective relief, but Treasury has not committed to providing it. Operators who have already claimed prior-year refunds have drawn IRS challenge, including litigation seeking repayment. Model your cash position under a reversal scenario before deciding.
What happens if the IRS later prescribes a different method?+
Guidance may set a default that differs from the method you chose. That is one reason to avoid a method you could not defend on its own merits, and to keep the underlying data granular enough to recalculate under a different approach. Operators holding transaction-level detail can rerun the numbers. Operators holding only a revenue ratio cannot.
Working With GreenGrowth CPAs
How does GreenGrowth CPAs help with 280E expense allocation?+
We assess whether your structure supports a two-trade-or-business position, select and document a method that matches how the business runs, and build the supporting evidence file. GreenGrowth CPAs has served cannabis operators since 2016. To review your position before filing, book a consultation through this site.
The Guidance Is Not Here Yet. Your Filing Deadline Is.
Book a 280E allocation review. We assess your structure, choose and document a defensible method, and build the evidence file before you file rather than after.
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GreenGrowth CPAs · Cannabis Advisory Team
