Does 280E Still Apply in 2026? Medical vs. Adult-Use Cannabis After Schedule III

That nuance matters more in New Mexico than a national summary suggests, because a large share of New Mexico licensees sell into two channels at once. The state operates an adult-use market under the Cannabis Regulation Act alongside the Medical Cannabis Program for enrolled patients, and a single retail location commonly serves both. Those are different transactions with different state tax treatment, and they may end up with different federal treatment as well. An operator whose books cannot separate them has no way to apply a distinction that may become financially significant.

The practical conclusion of this guide is not a tax position. It is an accounting instruction: build records now that can support whichever treatment turns out to apply, rather than waiting for guidance and then trying to reconstruct a year of activity you never tracked separately.

What is established, what changed, and what is unresolved

• Established: 280E disallows ordinary business deductions for a trade or business trafficking in Schedule I or Schedule II controlled substances, while cost of goods sold remains available through the inventory rules.
• Established: New Mexico runs both an adult-use market and a medical program, and the two are already distinguished in state tax treatment and at the point of sale.
• Changed: the federal rescheduling process has moved cannabis policy into active review, which is why 2026 planning conversations look different from 2021 planning conversations.
• Unresolved: whether, when and how any change takes effect for a given tax year, and what transition or amended-return treatment would follow.
• Unresolved: how mixed medical and adult-use operations would allocate or apportion shared costs if the two activities were ever treated differently.
• Unresolved: what documentation standard Treasury or the IRS would expect to support such an allocation.

Where this guide says something is unresolved, that is a statement of fact rather than hedging. There is no published allocation formula, no transition rule and no effective date to build into a chart of accounts. What can be built is a records system detailed enough to apply a formula later.

Consider a hypothetical Albuquerque retailer holding both a cannabis retailer license and an active medical patient base. Roughly a third of its transactions are medical, the rest adult-use. It runs one storefront, one payroll, one lease, one security contract, one seed-to-sale account and one inventory pool. Its financial statements report total revenue, total cost of goods sold and total operating expense. Nothing in the ledger says which dollar of rent or which hour of budtender labor supported which channel.

If federal treatment ever splits by activity, that operator has a problem that is not a tax problem. It is a bookkeeping problem, and it is retroactive: the year already closed without the data. The operators who will be positioned to act on new guidance are the ones whose systems were already segmenting activity before the guidance existed.

Revenue segmentation

Revenue is the easiest piece and the right starting point, because the point-of-sale system in a New Mexico dispensary already knows whether a sale was to an enrolled patient. The work is carrying that distinction into the ledger — separate revenue accounts, or a class or department dimension applied consistently — and then reconciling the split back to the POS daily sales report and to the state excise and gross receipts filings so the segmentation is verifiable rather than asserted.

Direct expenses

Some costs attach cleanly to one channel: patient-program compliance work, channel-specific packaging, promotional spend aimed at one audience, or staff whose role is entirely patient-facing. Direct costs should be coded directly. Every cost moved out of the shared pool and into a direct classification is one less item that ever needs an allocation.

Indirect and shared expenses

The hard category is everything genuinely shared: rent, utilities, security, insurance, point-of-sale and accounting software, management compensation, professional services, and the majority of hourly labor. There is no published, IRS-approved methodology for splitting these between medical and adult-use activity, and this guide does not offer one. What can be done now is to record the underlying facts — square footage, headcount, hours worked by function, transaction counts, revenue by channel — so that a reasonable and documented basis exists if one is ever needed.

Payroll

Payroll is usually the largest shared cost and the one with the most recoverable detail. Time tracking that captures function rather than just hours worked — sales floor, intake, inventory handling, production, administration — produces a contemporaneous record that no later reconstruction can replicate. This is also the coding that supports inventory and cost-of-goods-sold treatment, which makes it valuable regardless of how the federal question resolves. See cannabis payroll.

Inventory, COGS and seed-to-sale records

Inventory is where the medical and adult-use distinction gets genuinely difficult, because product frequently moves between channels after it has already been costed. Lot-level costing, disciplined transfer records and a reconciliation between the seed-to-sale system and the general ledger are what make any downstream allocation defensible. New Mexico's state track-and-trace environment records quantities and movement; it does not record value, and it is not a substitute for inventory accounting. That relationship is covered in inventory accounting and seed-to-sale reconciliation.

Contemporaneous documentation

The single most important word in this section is contemporaneous. An allocation supported by records created while the activity happened is a different exhibit from an allocation built from estimates two years later. Nothing here promises that any particular allocation would be accepted. The point is that an operator without records has no position to take at all.

A chart of accounts is the cheapest form of insurance available in this situation, because the changes required are structural rather than substantive: the same transactions, coded with more dimension. Restructuring prospectively costs a setup project. Reconstructing retroactively costs a forensic engagement, and often cannot be completed at all.

• Revenue split into medical and adult-use accounts, or a single revenue tree with a channel class applied on every transaction.
• Inventory accounts by stage — raw material, work in process, finished goods — with lot-level costing detail underneath.
• Cost of goods sold structured to mirror the inventory accounts so movement between them is traceable.
• Labor separated between inventoriable production and non-production functions, then by department.
• Shared overhead grouped into a distinct pool rather than scattered through operating expense, so an allocation has one clear input.
• Departments or classes reflecting how the business actually runs: retail floor, cultivation, manufacturing, delivery, administration.
• Location dimension for multi-store operators, applied consistently across revenue, cost and payroll.
• Reconciliation accounts and clearing accounts documented, with an owner and a monthly close step for each.
• A workpaper set stored alongside the close, tying each material balance to its source records.

None of this depends on the federal question resolving in a particular direction. A chart of accounts built this way produces better management reporting, cleaner inventory valuation and a faster year-end close whatever happens. Implementation is part of cannabis bookkeeping, and the broader framework is set out in the New Mexico Cannabis Accounting Guide.

A changing federal tax environment makes clean accounting more important, not less. Periods of transition attract examination attention precisely because taxpayers take new positions, and a position taken on a return is only as strong as the records behind it. An operator who treats rescheduling as permission to relax documentation has the analysis exactly backwards.

• Point-of-sale reports: daily sales summaries, channel and category detail, discounts, voids and refunds.
• Seed-to-sale records: intake, transfers, adjustments, waste and sales, exported and retained by period.
• Payroll records: time detail by function and department, pay registers, tax filings.
• Vendor invoices and purchase orders supporting inventory cost and operating expense.
• Inventory records: counts, valuation schedules, roll-forwards, variance investigations.
• Allocation workpapers: the basis chosen, the data behind it, the calculation, and the period applied.
• Written accounting policies: valuation, capitalization, revenue recognition, cutoff, close procedures.
• Supporting schedules for every material balance sheet account.
• Bank, merchant and cash reconciliations, including cash handling controls.

Assemble this as each period closes rather than in response to a notice. Preparation and response support are covered under audit representation, with background in the audit preparation guide.

• Does 280E currently apply to all of our activity, and how are you monitoring whether that changes?
• Can our accounting system distinguish medical activity from adult-use activity today, and if not, what would it take?
• How are shared expenses tracked right now, and what facts are we capturing that could support an allocation later?
• Is payroll tracked by actual function rather than a single blended labor account?
• Can our inventory balances and cost of goods sold be substantiated from source records?
• Do the point-of-sale system, the state track-and-trace record and the general ledger reconcile each month?
• What documentation supports our current accounting treatment if it is examined?
• What accounting changes would we need to make if additional federal guidance appears mid-year?
• How do our state excise and gross receipts filings tie back to the revenue reported in the ledger?
• Who owns each step of the monthly close, and where are the workpapers kept?

An advisor who answers these with specifics is doing 280E planning. An advisor who answers with predictions about federal policy is not. Our approach to the planning work is set out on the 280E tax planning service page, and the statutory background is in 280E Explained and the New Mexico Cannabis Tax Guide.

To start, schedule a consultation or call (505) 835-7785. This guide is educational and is not tax advice for any specific business.