Five Signs Your Cannabis Grow Is Overpaying Under §280E

This one is for the boutique cultivator who suspects the tax bill is too high but cannot point to why — and so cannot tell whether the $375 audit would actually find anything. Here is the thing about §280E overpayment: it is silent. It does not generate a letter from the IRS. It does not flag on your return. It just sits there, quarter after quarter, as a number that is bigger than it needs to be. So instead of a vague "get a review," here are five specific, checkable symptoms. If you recognize two or more of them, the audit will almost certainly pay for itself in the findings memo alone.

Sign 1 — Your COGS is "flower plus nutrients" and nothing else

Pull your COGS schedule. If the only things on it are direct materials — the plant, the nutrients, maybe direct grow labor — you are leaving money on the table, and a lot of it. The full-absorption rules of §471-11 let a producer capitalize a whole layer of indirect production costs into inventory: rent on production space, the utilities that run the grow, depreciation on cultivation equipment, the supervision of the people doing the growing. Under §280E, every dollar you can legitimately move into COGS is a dollar that survives — because COGS was always the one thing §280E could not take away. A direct-materials-only COGS schedule is the single most common overpayment pattern I see in cultivation, and it costs real money on both the medical and the adult-use side. I break down exactly what can and cannot go into COGS in a separate guide in this library.

Sign 2 — You allocate overhead by revenue instead of by canopy

If you split shared costs between medical and adult-use using a revenue ratio, you are very likely understating the deductible medical portion. Revenue-based allocation distorts the split for a cultivation operation, because revenue and grow space do not track each other cleanly — and post-rescheduling, that distortion is no longer harmless the way it was when everything sat inside §280E. Square-footage allocation is generally both more defensible and more favorable for a grow, since canopy is measurable and rational. I walk through why in The Medical-vs-Adult-Use Allocation and in the square-footage guide in this library.

Sign 3 — You are not segregating medical from adult-use at all

This is the big one. If your books do not split revenue and costs by designation, you cannot claim the going-forward deduction that qualifying medical activity is now entitled to under current law — you are effectively filing as if the whole operation were still Schedule I, which for the medical slice it no longer is. You cannot deduct what you cannot show, and you cannot show a split you never tracked. If this is you, the fix starts the day you start segregating, and I explain what changed and why in Medical Cannabis Is Now Schedule III.

Sign 4 — You have no COGS workpapers

A COGS number with nothing behind it is a liability. If your return shows a cost-of-goods-sold figure but there are no schedules tying it to your Metrc and POS data, two things are true at once: the number almost certainly understates the legitimate costs you were entitled to capitalize, and if the IRS ever looks, they will reconstruct it against you rather than for you. Workpapers are how you both capture the full, defensible COGS and protect it. I cover what a proper full-absorption workpaper set looks like in its own guide here.

Sign 5 — This year's allocation is a copy of last year's

Before rescheduling, your allocation method did not matter for federal tax — every activity was inside §280E, so it made no difference which bucket a cost landed in. That changed. Post-rescheduling, the medical-versus-adult-use split is the single most valuable number on your return. If you have not revisited the method since the change took effect in 2026, you are almost certainly carrying forward an allocation built for a world where the answer did not matter — and leaving the deduction on the table because of it. Treat the 2026 transition-year timing itself as something to confirm against current IRS guidance before you file, but do not let a stale method ride.

The common thread

Every one of these is a silent overpayment. No notice, no IRS contact, no drama — just a tax bill that is quietly higher than it should be. The only way to know for certain is to recompute, which is exactly what the diagnostic does.

Screen yourself in sixty seconds

1. Does your COGS schedule include indirect production costs, or just direct materials?
2. Is your overhead allocated by canopy, or by revenue?
3. Are medical and adult-use segregated in your books?
4. Do you have COGS workpapers that tie to Metrc and POS?
5. Have you revisited your allocation method since rescheduling took effect?

Answer "no" to two or more and the odds are strong the audit finds real money.

What it costs to do nothing

The danger of a silent overpayment is that it compounds. Every quarter you file under the old method is a quarter you overpay, and unlike a going-forward fix, the amended-return path for prior years is contested — the IRS is actively pushing back, which I cover in the guide on amended returns and refund claims. So the asymmetry is stark: the going-forward correction is the sure thing, and every quarter you wait costs you — illustratively, for an operator at this scale, on the order of $10,800 — that you do not get back. The fix is cheap; the delay is not.