Medical vs. Adult-Use Expense Allocation

What actually changed

For fifty years every cannabis operator lived under the same rule. Section 280E blocks deductions and credits for any business trafficking in a Schedule I or Schedule II substance, leaving cost of goods sold as your only offset against revenue. That is why cannabis businesses pay effective federal rates that would put any other industry out of business.

In April 2026 that split in half. FDA-approved marijuana products and marijuana under a qualifying state medical license moved to Schedule III. Since 280E only reaches Schedule I and II, it stopped reaching those activities. Rent, payroll, marketing, and ordinary operating expenses became deductible again on the medical side.

Adult-use did not move. It is still Schedule I, and 280E still applies to it in full.

So if you operate in a dual-license state, you are now running one business under two completely different federal tax regimes, using one set of books that was almost certainly built for one.

The part nobody has answered

Mixed operators have to allocate shared costs between the two. That much is clear. What is not clear is how, because the IRS has not published final guidance on the method, and it is late enough in the year that a lot of operators are going to reach January without it.

Waiting for that guidance is the wrong move, and here is why. Whatever method the IRS eventually blesses, every one of them requires the same underlying thing: books that can tell medical activity apart from adult-use activity at the transaction level. If your ledger cannot produce that split, no guidance helps you, because you will have nothing to apply it to.

The operators who are going to have a bad January are not the ones who picked the wrong method. They are the ones who cannot produce any number at all and end up handing their preparer a spreadsheet and a guess.

Direct costs first, allocation second

The single biggest mistake I see is operators treating this as one giant allocation exercise. It is not. Most of your cost base can be assigned directly, and every dollar you assign directly is a dollar you never have to defend with a formula.

Work in this order:

1. Direct medical. Product, labor, and costs that touch only the medical side. Assign at the source.
2. Direct adult-use. Same on the other side.
3. Genuinely shared. Whatever is left. Rent on a shared building, general management payroll, insurance, the accounting fee. This is the only pool that needs a method.

Get the first two right and the third pool usually shrinks to a fraction of what operators expect. That is the whole game.

The four allocation methods, and what each one costs you to defend

For the shared pool, four approaches are in common use. None is officially blessed yet. Each requires different documentation, and the documentation is the part people skip.

Two rules that matter more than which method you choose. Match the driver to the cost. Allocating rent by revenue share when medical occupies a quarter of your floor is hard to defend and easy for an examiner to take apart. And apply it consistently. Switching methods mid-year because one produced a better answer is the fastest way to lose the whole allocation.

What your chart of accounts has to do

Here is where this stops being theory. A workable structure has three dimensions running at once:

• The account tells you what the money was. Rent, wages, packaging.
• The license track tells you which tax world it lives in. Medical, adult-use, or shared.
• The department tells you whether it is capitalizable into COGS or an operating expense. This still matters enormously on the adult-use side, where COGS is your only shelter.

In QuickBooks Online that usually means classes carrying the license track and locations carrying the department, or the reverse depending on how your entities are structured. The mechanics are less important than the discipline. Every transaction gets tagged at entry, not sorted out in December.

The shared pool gets its own set of accounts so it is visible rather than buried. At period end the allocation runs as a documented journal entry with the driver attached, which means a year later you can show exactly how the number was built. That last part is what makes it survive an examination.

One more thing worth saying out loud: your COGS discipline on the adult-use side did not get any less important. Half your business is still living under 280E, and cost of goods sold is still the only thing standing between it and a brutal effective rate. Rescheduling made your books more complicated, not simpler.

What to do before 12-31-2026

1. Find out whether your books can answer the question at all. Run a P&L split by license track. If you cannot produce one, that is your answer and you have roughly one quarter to fix it.
2. Rebuild the tagging structure so every transaction carries a license track and a department from the moment it enters.
3. Reduce the shared pool by pushing everything that can be directly assigned out of it.
4. Pick a driver for each remaining shared cost and write down why. One page. That page is your defense.
5. Catch up year to date. This is the painful one. Transactions from January forward have to be re-tagged, and it is much cheaper in October than in March.
6. Hand your preparer a clean split, not a shoebox. Their job is the return. Producing the number is yours.

Questions I get asked