ANN ARBOR – Michigan and Ohio adult-use cannabis businesses could potentially keep hundreds of thousands of dollars more each year for payroll, hiring, expansion and other operating costs if recreational marijuana is moved from Schedule I to Schedule III under federal law.
The reason is a federal tax provision known as Section 280E. Because adult-use marijuana remains a Schedule I controlled substance, cannabis businesses generally cannot deduct ordinary business expenses such as employee wages, rent, advertising, legal fees, software and utilities when calculating their federal income taxes. Most other legal businesses can.
The financial difference can be enormous.
A Michigan adult-use marijuana retailer with $4 million in annual sales could see its federal tax bill fall by approximately $252,000 a year if 280E no longer applied, according to a hypothetical example prepared for MITechNews by Thomas Lavigne, a metro Detroit cannabis attorney with Cannabis Counsel.
Cannabis Counsel was founded in 1999 as a law firm devoted specifically to cannabis law and describes itself as America’s first cannabis law firm. Lavigne, who advises cannabis businesses on regulatory compliance and business law, served as 2022–2023 chairman of the Cannabis Law Section of the State Bar of Michigan.
That gives Lavigne a long view of an industry that has evolved from prohibition through medical marijuana legalization and into today’s multibillion-dollar state-regulated cannabis market.
Potential federal tax relief comes at a critical time. Michigan operators are already absorbing the state’s new 24% wholesale tax on adult-use marijuana, while operators in both Michigan and Ohio contend with intense competition and pressure on profit margins.
But federal 280E relief for the adult-use industry hasn’t arrived—and the proceeding that could help trigger it has again been delayed.
Medical Marijuana Already Has Different Federal Treatment
Medical marijuana is now in a different position.
Earlier this year, the federal government moved marijuana products regulated under qualifying state medical marijuana programs to Schedule III.
That matters because Section 280E applies to businesses trafficking in substances classified under Schedule I or Schedule II of the Controlled Substances Act.
Moving qualifying medical marijuana products to Schedule III therefore potentially removes those operations from 280E’s restrictions on ordinary business deductions.
States determine whether to operate qualifying medical marijuana programs, making state licensing central to which marijuana products can receive that federal treatment.
But in Michigan, the medical marijuana market has dwindled to a tiny fraction of the state’s cannabis industry.
Michigan: $258.8 Million Adult-Use Vs. $296,000 Medical
Michigan recorded approximately $258.8 million in adult-use marijuana sales during August compared with just $295,941 in medical marijuana sales, according to the Michigan Cannabis Regulatory Agency.
That means medical marijuana represented only about 0.11% of Michigan’s regulated cannabis sales during the month.
Put another way, Michigan’s adult-use market was roughly 874 times larger than its medical market in August.
So while Schedule III treatment for qualifying medical marijuana operations is significant for the businesses involved, it reaches only a tiny portion of Michigan’s overall regulated cannabis economy.
The vast majority of the state’s approximately $259 million August cannabis market remains adult-use.
And those businesses continue to face 280E.
Ohio’s Adult-Use Market Also Dominates
Ohio provides another example of why the remaining federal rescheduling question matters.
Unlike Michigan, Ohio still has a substantial medical marijuana market. But adult-use sales have rapidly overtaken it.
Through early September, Ohio had generated approximately $914 million in combined marijuana sales during 2026, including roughly $785 million in adult-use sales and $129 million in medical sales.
That puts adult-use cannabis at approximately 86% of Ohio’s regulated marijuana market so far this year.
Ohio’s medical market also has been contracting as recreational sales grow.
During the first half of 2026, Ohio medical marijuana sales declined about 29% compared with the previous year while adult-use sales increased approximately 49%.
The trend in both states points in the same direction: adult-use cannabis represents the overwhelming majority of legal marijuana sales.
That’s why the remaining federal rescheduling proceeding could have much greater economic consequences than the medical marijuana change alone.
THE MONEY: What 280E Can Cost A Cannabis Retailer
Lavigne provided MITechNews with a hypothetical example showing what 280E can mean for a Michigan adult-use retailer.
Consider a dispensary with:
- Annual sales: $4 million
- Cost of goods sold: $2.2 million
- Operating expenses: $1.2 million
- Actual economic profit: $600,000
- Federal tax under 280E: $378,000
- Federal tax without 280E: $126,000
- Potential annual difference: $252,000
The reason for the difference is relatively straightforward.
Under 280E, Lavigne’s hypothetical retailer cannot deduct $1.2 million in selling, general and administrative expenses when calculating federal taxable income.
That leaves approximately $1.8 million subject to federal corporate income tax even though the business actually earned only $600,000 after operating expenses.
At a 21% federal corporate tax rate, that produces a federal tax bill of approximately $378,000.
Without 280E, the $1.2 million in ordinary operating expenses could be deducted. Taxable income would fall to $600,000 and the federal corporate tax bill to approximately $126,000.
The company would retain approximately $474,000 after federal corporate income tax instead of $222,000.
That’s an additional $252,000 in annual cash flow potentially available for employees, wages, expansion, equipment, debt reduction or simply keeping the operation financially viable.
Michigan’s 24% Wholesale Tax Raises The Stakes
Potential federal tax relief could be particularly important in Michigan because adult-use operators began paying another major state tax this year.
Michigan’s new 24% wholesale tax on adult-use marijuana took effect Jan. 1, adding another tax at the wholesale level to the state’s existing 10% adult-use retail excise tax and 6% sales tax.
Lavigne said the combination creates significant cash-flow pressure for operators already confronting compressed marijuana prices.
But he cautioned businesses against assuming 280E relief is imminent.
It isn’t.
IRS Makes 280E Guidance A Priority
The IRS and Treasury Department recently included “Guidance under §280E” in their 2026–2027 Priority Guidance Plan.
The plan identifies projects federal tax officials intend to prioritize during the fiscal year ending Sept. 30, 2027.
Its inclusion does not eliminate 280E or itself change federal tax law.
But Lavigne said it indicates federal tax authorities recognize that administrative clarification will be necessary.
Among the questions he expects federal officials may have to answer are when 280E relief becomes effective, whether businesses could amend previous tax returns and how cannabis companies should transition from their current accounting practices to conventional business deductions.
Another potentially important issue involves open tax years.
Some cannabis operators have filed protective refund claims seeking to preserve their ability to recover taxes if subsequent federal actions or court decisions permit retroactive relief.
Lavigne said individual operators should consult tax counsel about whether such claims make sense for their circumstances.
He also cautioned businesses against beginning to claim ordinary deductions as though 280E has already disappeared.
For adult-use cannabis businesses, it hasn’t.
Adult-Use Rescheduling Case Hits Another Delay
Meanwhile, the separate federal proceeding that could move adult-use marijuana from Schedule I to Schedule III has encountered another delay.
DEA Chief Administrative Law Judge Derek C. Julius conducted hearings beginning June 29 and concluding July 15.
Post-hearing briefs were subsequently filed, leaving Julius to prepare a recommended decision.
That recommendation hasn’t been issued.
Instead, Julius temporarily stayed the proceeding Sept. 29 while considering requests involving a new Government Accountability Office report examining federal drug-scheduling procedures.
Groups opposing rescheduling want the GAO report added to the administrative record and additional briefing permitted.
The federal government and other participants have until Oct. 13 to respond.
Could The Delay Become Significant?
Lavigne described the stay as procedural but potentially significant in practice.
If Julius denies the request to expand the record, the stay could be lifted and he could resume preparing his recommended decision.
If the judge allows the GAO report into the record, however, additional briefing could be required.
Lavigne said that could extend the proceeding considerably.
The administrative record also matters because a final DEA rescheduling decision could face challenges in federal court.
That means the record being assembled now could eventually be reviewed by federal appeals judges considering whether DEA followed federal administrative law.
What Should Cannabis Businesses Do Now?
Lavigne’s message to operators is essentially: prepare, but don’t assume.
Adult-use businesses should not begin taking ordinary business deductions as though 280E has already been eliminated.
Instead, Lavigne said operators should maintain detailed financial records separating selling, general and administrative expenses from inventory-related costs.
Companies also may want their accountants and attorneys to examine their corporate structures and whether protective refund claims should be considered for open tax years.
Most importantly, operators shouldn’t build 2026 or 2027 budgets around anticipated 280E savings that haven’t materialized.
For Michigan businesses, the contrast is particularly stark.
The state’s 24% wholesale adult-use tax is already being collected.
Potential federal relief from 280E for adult-use businesses isn’t.
Ohio operators face the same unresolved federal 280E issue as their adult-use market continues expanding.
The next important date comes Oct. 13, when the federal government and other participants can respond to the latest motion before Judge Julius.
What happens after that could help determine how soon cannabis businesses in Michigan, Ohio and other adult-use states learn whether one of the industry’s largest federal tax burdens will finally disappear.
