Cannabis R&D Credits After Section 280E Relief

Federal cannabis rescheduling removes activities covered by the Department of Justice’s (DOJ’s) final order from Section 280E. For an industry that historically has focused on maximizing the cost of goods sold (COGS) due to Section 280E, the DOJ’s final order opens the door to broader tax planning opportunities, including R&D tax credits under Section 41 for qualifying technical work. Because the credit reduces federal income tax liability dollar for dollar, the benefit can be meaningful for businesses with significant qualifying research activities and related costs.

The opportunity for Section 41 R&D credit planning for cannabis companies is real, but it is not automatic. Companies need to determine which activities fall within the DOJ’s final order, consider forthcoming transitional guidance from the U.S. Department of the Treasury and the IRS, identify projects that satisfy the ordinary Section 41 rules, and build the cost and documentation support needed to calculate and defend a claim.

Background

Section 280E denies deductions and credits for amounts paid or incurred in carrying on a trade or business that consists of trafficking in Schedule I or II controlled substances prohibited by federal law. Because marijuana is a Schedule I controlled substance under current federal law, cannabis operators generally have not had access to the full range of deductions and credits available to other businesses. As a result, many cannabis businesses have not spent much time evaluating research credit opportunities, even when they perform substantial technical work.

The DOJ’s final order, effective April 22, 2026, changes the conversation. It reschedules from Schedule I to Schedule III marijuana contained in FDA-approved products, marijuana subject to a state medical marijuana license, certain marijuana extracts, and certain naturally derived delta-9-tetrahydrocannabinols. Unlicensed marijuana crops, bulk marijuana, and marijuana or marijuana extract not yet incorporated into an FDA-approved drug product remain in Schedule I. For tax purposes, any Section 41 opportunity will depend first on whether the relevant entities, products, and activities fall within the scope of the final order.

Crowe observation

Businesses with activities outside the scope of the final order shouldn’t ignore potential Section 41 planning opportunities. Additional hearings are expected later this month, and the broader momentum around rescheduling could expand the categories of marijuana no longer subject to Section 280E.

Treasury announced forthcoming guidance on the tax consequences of the order, including guidance to apply Section 280E relief to a business’s first full taxable year that includes the effective date of the DOJ’s final order.

Turning research into a credit claim

Section 41 generally allows a credit for qualified research expenses. For companies new to the credit, the starting point for evaluating eligible activities is Section 41’s four-part test. In the cannabis industry, the analysis should focus less on labels such as cultivation, processing, or testing and more on whether the underlying work satisfies each of the following Section 41 requirements:

• Permitted purpose. The activity must be intended to create or improve a product, process, software, technique, formula, or invention, with the improvement tied to performance, reliability, quality, or functionality.
• Technical uncertainty. At the outset, the company must be trying to eliminate uncertainty about the capability, method, or appropriate design. For cannabis businesses, that is the difference between attempting to solve a technical problem and simply carrying out an established process.
• Process of experimentation. Substantially all of the activity must involve evaluating alternatives through testing, trial runs, modeling, prototyping, iteration, or similar experimentation. Routine production or compliance work generally is not enough by itself.
• Technological in nature. The activity must rely on principles of engineering, chemistry, biology, computer science, or another hard science. For cannabis companies, this often means the work must be rooted in technical disciplines rather than business preference or ordinary commercial judgment.

Qualified research expenses generally can include wages, supplies, certain cloud-computing or computer rental costs, and eligible contractor payments. Common cannabis business activities to evaluate include:

• Cultivation and genetics
• Extraction and processing
• Product formulation
• Lab and analytical methods
• Automation and software

Crowe observation

Identifying and documenting qualifying activities and related costs usually requires a formal credit study to quantify the credit, connect costs to qualifying work, and build the substantiation needed to support the claim.

Looking ahead

Cannabis companies should act now by identifying the technical activities they already are performing and evaluate how the R&D tax credit can become part of their tax planning moving forward. Companies with eligible activities should consult their tax adviser to evaluate eligibility for the credit and determine the next steps, including whether to perform a formal credit study.

Section 280E relief applies to eligible activities currently identified in the DOJ’s final order. Future proceedings could expand the categories of marijuana no longer subject to Section 280E. The companies that will be best positioned to benefit from these changes are those that plan early, define scope carefully, and build a supportable credit and documentation process before filing positions are set.

Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.