For decades, 280E prevented cannabis operators from deducting ordinary business expenses"a restriction originally designed for illegal drug traffickers. Now, for the first time in modern cannabis history, state-licensed businesses can operate on a level playing field with other federally regulated industries.
Why 280E Was So Devastating
Under 280E, cannabis companies were only allowed to deduct cost of goods sold (COGS). Everything else"payroll, rent, marketing, security, insurance, software, utilities"was fully taxable.
- Effective tax rates often exceeded 60-80%
- Small operators were hit hardest, with razor-thin margins
- MSOs relied on complex entity structures to soften the blow
- Expansion, hiring, and innovation were slowed dramatically
With Schedule III, cannabis businesses can finally deduct expenses like any other legal industry. This is the single biggest financial relief the sector has ever seen.
What Profitability Looks Like After Schedule III
Removing 280E doesn't magically fix every financial challenge, but it does transform the core economics of the industry. Operators can expect:
- Lower effective tax rates across all states
- Higher net margins for both retail and cultivation
- Improved cash flow and reduced debt pressure
- More competitive pricing as savings pass to consumers
For many businesses, this is the difference between barely surviving and finally scaling.
Banking and Financing: What Changes and What Doesn't
Schedule III does not automatically fix cannabis banking"but it does move the needle.
What improves:
- Lower perceived risk for lenders
- More willingness from regional banks and credit unions
- Better loan terms and interest rates
- Potential entry of new financial service providers
What stays the same (for now):
- Federal banking laws still treat cannabis as a controlled substance
- Major banks remain cautious
- Cash-heavy operations continue in many markets
In short: banking gets easier, but not frictionless. True reform still requires congressional action.
M&A, Consolidation, and Investor Appetite
With 280E gone, the investment landscape shifts dramatically. Private equity, venture capital, and institutional investors now see a clearer path to profitability.
Expect to see:
- Increased M&A activity as stronger operators acquire distressed assets
- Higher valuations for profitable, well-run businesses
- New capital entering the market from previously hesitant investors
- Multi-state operators expanding aggressively into newly viable markets
The post-280E era will likely accelerate consolidation"but it also creates opportunities for small operators who can now compete more fairly.
Operational Shifts: What Businesses Should Do Now
With new tax flexibility, operators should reassess their entire financial and operational strategy. Key priorities include:
- Rebuilding budgets and forecasting models
- Reevaluating staffing, benefits, and compensation
- Investing in compliance, security, and technology
- Optimizing supply chain and inventory management
- Preparing for increased federal oversight
The companies that adapt quickly will gain a significant competitive advantage.
The Bottom Line
The end of 280E is a monumental turning point for the cannabis industry. While Schedule III doesn't solve every challenge"especially around banking and federal legality"it fundamentally reshapes the financial foundation of the market.
For a full breakdown of the policy shift that made this possible, revisit our in-depth explainer: Trump's Historic Cannabis Executive Order: What Rescheduling to Schedule III Really Means.
For the first time, cannabis operators can build sustainable, profitable businesses without being punished by the tax code. The next few years will define which companies capitalize on this moment"and which fail to adapt.
