“Rescheduling removes a major structural penalty, but tariffs will reshape who captures the gains. All else equal, dispensary-heavy companies may emerge as the primary beneficiaries.”
By Justin Leiby, Cannabis Research Institute
With federal cannabis rescheduling partially underway and the potential end of the 280E tax penalty approaching, how much relief the cannabis industry will experience is an open question. No matter what the future holds, 280E is a significant financial drag on cannabis operators.
I run an annual survey of cannabis operators for the Illinois Cannabis Regulation Oversight Office, and in the most recent survey operators estimate that 44 percent of their 2024 operating expenses were nondeductible under 280E, which only applies to Schedule I and Schedule II drugs. Assuming a 21 percent corporate tax rate, this translates into a $92 penalty for every $1,000 spent.
Beyond the (hopefully) temporary importance of distinguishing medical versus adult-use operations under the Trump administration’s current process of moving cannabis to Schedule III, the pain of the 280E penalty has not been evenly distributed—and those who suffered the most may reap greater benefits.
Smaller operators report more 280E disallowances than larger companies (45 percent vs. 37 percent of operating expenses), as do companies that rely entirely on dispensary operations versus those that don’t (50 percent vs. 43 percent).
Comparing The Impacts Of 280E And Tariffs
To put the financial impact of rescheduling in context, one should consider that some of the benefits may never hit operators’ bottom lines thanks to the impact of tariffs imposed over the past year.
I combine survey responses from Illinois with public financial filings to better understand the relative impacts. Like all businesses, cannabis operators have two types of operating costs: the direct costs of acquiring and producing their products like raw materials (“costs of goods sold”) and the indirect costs of operating the business like rent and insurance (“selling, general, and administrative expenses” or “SG&A”).
Tariffs primarily impact the former, larger chunk, while 280E primarily impacts the latter.
Together, these costs consume 84 cents of every dollar of revenue that cannabis operators generate, while paying creditors and non-280E taxes consumes another six cents. I estimate a 280E penalty of three cents per dollar by multiplying a 44 percent average disallowance, the 35 percent SG&A percentage, and the 21 percent U.S. corporate tax rate. Given the small profit margins in cannabis, the financial benefit of eliminating the 280E penalty is undeniable.
However, this will be partially or completely offset by tariffs increasing input costs like packaging, vape hardware and construction materials. One in six operators reports input cost increases of 20 percent or more and over half report increases of 5 percent or more.
In my example, even a modest 5 percent increase erases most of the benefit from 280E penalty relief and an 18 percent increase erases all profits altogether.
Variable and Delayed Benefits
Much like 280E, the tariff burden falls heavier on some operators than others—in this case, on cultivation and infusion operations that rely on imported packaging products, buildouts and high-tech hardware. One in six cultivation and infusion companies (17 percent) report input cost spikes exceeding 20 percent, while no dispensary-only company reported this impact.
Because dispensary-only operators face larger tax distortions from 280E and report smaller impacts from tariffs, they may benefit the most from ending the 280E penalty.
Rescheduling Changes The Competitive Landscape
Rescheduling removes a major structural penalty, but tariffs will reshape who captures the gains. All else equal, dispensary-heavy companies may emerge as the primary beneficiaries.
That said, observations like this should start the discussion rather than settle it. Some benefits of rescheduling won’t materialize immediately, because operators have made long-term strategic choices based on 280E tax constraints and cannot unwind these choices instantly.
For instance, in the Illinois survey over half of operators report that 280E led them to cut discretionary investments in product development, research and sustainable technologies required for a market to mature. Similar percentages report moving to leaner staffing models, which can impact everything from safety protocols to customer experience, and modifying facility layouts due to tax considerations, e.g., limiting retail sales space that is harder to deduct.
“Who wins” depends on how well operators can adapt to the new landscape.
Justin Leiby, PhD, is a professor of accountancy in the Gies College of Business at the University of Illinois and a faculty in residence at the Cannabis Research Institute. His research and teaching focuses on auditing, governance and risk management, and includes extensive collection and analysis of operational and financial data in the cannabis industry.
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