For more than four decades, Section 280E of the Internal Revenue Code presented cannabis operators with a unique challenge unlike any other legal business: taxing them on income they never retained. A dispensary could only deduct the cost of its products, with almost no other expenses such as rent, payroll or marketing deductible, leading to inflated income taxes. Federal rates typically reached 70 to 80 percent of net income.

However, this regime ended on April 22, 2026 for state-licensed medical marijuana operators. For those who lived through it, the key question now is not whether they overpaid, but how much they can still recover and whether they will take action before the statute of limitations quietly closes the door on their prime years.

Section 280E does not allow a deduction or credit for a business “trafficking in controlled substances (under Schedules I and II of the Controlled Substances Act).” See 26 USC § 280E. The key words are “Schedule I and II”. The provision goes no further. While marijuana was in Schedule I, every licensed grower, processor and dispensary in the state was a “trafficker” in the eyes of the IRS, and the standard deductions available to all other businesses under Section 162 were off the table.

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