With 280E Lifted, a Facility Expansion Is No Longer Just Capital Investment — It Is One of the Most Powerful Tax Structures Available to a Cannabis Business. Here Is How to Capture It.

For years, the cannabis industry was taxed as if it were not really a business. Section 280E of the Internal Revenue Code disallowed deductions for ordinary operating expenses, taxing operators on gross profit instead of net income and driving effective federal rates north of 60%. As we wrote in May, that era ended on April 22, 2026, when the Department of Justice placed state-licensed medical marijuana into Schedule III. (See our article, “280E Is Gone. Now What?”)

The relief is real and earned. But relief is not a strategy. The operators who define the next decade of this industry will not be the ones who simply enjoy better cash flow. They will be the ones who recognize what the tax code now permits — and move before their competitors do.

Here is what the leaders in this field will not walk past: a properly structured cannabis facility expansion is no longer just a capital investment. It is an R&D tax credit engine and one of the most favorable deduction structures available under current law. Most operators do not know this yet. Those who learn it first will have a structural cost advantage over those who learn it later.

Why a Facility Build Generates R&D Credits

The first reaction is almost always a question: our building is depreciated — how can construction costs generate R&D credits?

It is a fair question, and the answer is grounded in the plain text of Section 41. The depreciation limitation that operators have in mind applies only to one of three categories of qualified research expenses — in-house supplies, the stock materials a company buys directly. It does not touch the other two: in-house labor and contract research. A facility build is overwhelmingly contract-driven. Engineering firms, specialty contractors, and custom automation vendors are hired to design and construct systems to the operator’s performance specifications. When that work meets the qualifying research tests, it is contract research — and the depreciation prohibition does not reach it. We developed this analysis in detail in our manufacturing facility article, “Building a New, Expanded, or Upgraded Factory? You May Also Have Built a Significant R&D Tax Credit.”

In a cannabis facility, the qualifying systems are everywhere a custom decision was made: grow rooms engineered for specific environmental control of light, humidity, CO2, and temperature; extraction and processing equipment built to the operator’s throughput and purity targets; HVAC designed for the particular cultivation environment; custom electrical, plumbing, and water treatment; and, in some builds, the structure itself. If a system had to be engineered to this operation’s requirements rather than pulled off a shelf, it belongs in the analysis. In a typical custom build, 50% to 60% of project cost qualifies.

The Numbers on a $30 Million Build

Take an operator who puts $30 million into facility expansion across 2026, 2027, and 2028 — $10 million each year — after several lean research years averaging roughly $300,000 annually from 2021 through 2025. Of that spend, $20 million is contract research that qualifies.

Under the Alternative Simplified Credit (ASC) method, calculated at the 14% rate against that low prior-year base, the federal R&D credit across the three build years approaches $2.8 million. That is a dollar-for-dollar reduction in federal tax — now usable, because 280E no longer stands in the way.

State credits stack on top, and they do not reduce the federal number. The ten cannabis-legal states with the most favorable R&D credit regimes would generate the following estimated state credits on this same scenario:

Estimated State Credit

Estimated state credits on the eligible $20 million contract research base across the 2026–2028 build years.

1 Rhode Island: $1,716,000

2 California: $1,521,000

3 New Jersey: $1,014,000

4 Ohio: $708,500

5 Illinois: $663,000

6 Minnesota: $615,000

7 Connecticut: $610,000

8 Arizona: $508,000

9 Massachusetts: $508,000

10 Delaware: $508,000

Add the top of that table to the federal figure, and an operator completing this build in Rhode Island is looking at roughly $4.5 million in combined federal and state R&D credits — credits, not deductions. For most operators, that is not a number they have ever associated with pouring a slab and installing equipment. It is, however, exactly what a well-substantiated claim on a serious build should produce.

Section 174 Expensing Beats Bonus Depreciation

Most operators planning a build already know about bonus depreciation. A cost segregation study reclassifies portions of the building into shorter-lived property eligible for 100% first-year expensing, restored under the One Big Beautiful Bill Act (OBBBA). On a custom facility, cost segregation typically captures 25% to 35% of project cost — on $30 million, a first-year deduction of $7.5 to $10.5 million. Real money.

Section 174 (the provision governing the deduction of research and development costs) reaches further. OBBBA restored immediate Section 174 expensing, and it applies to the contract research and in-house labor that qualify as QREs — the same 50% to 60% of the build. On $30 million, that is a deduction pool of $15 to $18 million: nearly double the bonus depreciation on the same project. And the timing is better. Bonus depreciation is available only when the asset is placed in service; Section 174 expensing is available in the year the cost is paid or incurred, often 1 to 3 years earlier. We compared these two strategies head-to-head in our manufacturing facility article — the gap holds in cannabis.

These are not competing choices. Cost segregation captures structural and mechanical components that Section 174 does not reach; Section 174 captures the engineered research that cost segregation cannot. The leaders examine both and, with their provider's help, combine them to maximize their deductions.

Amortization: The Path to Zero Taxable Income

This is where cannabis operators have a planning need that most industries never face, and where Section 174 offers a tool nothing else does.

Even with 280E gone, many operators will still show 20% to 40% of net income as taxable. They are well aware that principal payments on debt are not deductible, so a business that is healthy on paper can carry substantial phantom income — income that is taxable without a matching inflow of cash. The instinct is to bury it under deductions from the build. The instinct is right; the mechanics are where operators fare less well.

Suppose the build throws off large losses through bonus depreciation or full Section 174 expensing. Those losses become a net operating loss (NOL), and an NOL carried forward can only offset 80% of taxable income in a later year. The remaining 20% stays on the table, taxed. For an operator trying to neutralize phantom income, that 20% hurts.

Section 174 amortization does not live under that ceiling. Under the election, the company spreads qualified research costs over 60 months or 10 years, its choice. Because amortization is a current-year deduction rather than a carried-forward NOL, the 80% limitation never applies. Deployed against income year by year, it can take taxable income to zero — a sight no cannabis operator has ever seen before. For a business managing phantom income from non-deductible principal, that is not a rounding difference. It is the difference between writing a check and not writing one.

Prior Years: The State Window Has Been Open All Along

There is a reason we have been claiming R&D credits for cannabis clients since before COVID: state credits never lived under 280E. Section 280E is a federal disallowance. Most states with R&D credit regimes did not adopt it, so the state-level opportunity has been available to cannabis operators for years — quietly, and largely unclaimed. One client’s $25 million build generated $600,000 in state credits.

If you completed facility work between 2022 and 2025 and never filed for state R&D credits, those years are still open. State amendment windows generally run three to four years, and they process quickly — typically three to six months, against the 12 to 18 months an amended federal return now takes. The state refund is the near-term money. The 2022 year is the one in jeopardy: for most operators, it falls out of statute this summer.

Protective Returns: Preserving the Federal Prior-Year Claim

The federal prior-year picture is live but unsettled. The DOJ order expressly encouraged Treasury to retroactively extend 280E relief to years in which operators held valid state medical licenses. Treasury and the IRS have acknowledged it and are believed to be working on forthcoming guidance. However, they have not yet said yes — and the statute of limitations will not wait for them.

The move here is a protective amended return: file the 2022 claim now, on the position that retroactive relief applies, before the year closes this summer. You are not betting on the guidance. You are making sure that if it lands favorably, your year is still open to receive it. File after the window shuts, and a favorable ruling does you no good — the door is already closed.

Patience comes after the filing, not before it. The IRS is taking 12 to 18 months on amended returns, and likely longer, given staffing. The refund is real; the timeline is not fast. File now, so the clock starts now.

Why Substantiation Decides the Outcome

A facility-build credit is won or lost on substantiation, and this is where most claims fall apart — and where we built our practice. Draw reports and invoices prove what was spent. They do not explain what was engineered, what technical uncertainty was confronted, or how it was resolved. That narrative lives with the general contractor and the subcontractors, not in the operator’s files.

Capturing it means going to the source: draw reports, meeting minutes, issues logs, change orders, and technical specifications from the GC and each trade, plus bid documents and updated standard operating procedures from the operator. Key participants, including each subcontractor, are interviewed, with great respect for their time. The output is a digital audit library organized by subsystem, written so an IRS examiner can evaluate the claim without ambiguity. That is the bar. A claim that is easy to examine is a claim that holds. When documentation is complete before an audit is called, resolutions are quick, and outcomes are positive.

Who Should Move, and When

If you hold a state medical cannabis license and have built, expanded, or significantly upgraded a facility in 2022 or later — or you are planning to — the answer is now, and the reasons differ by where you sit:

•        If you have a build underway or on the drawing board, engage an R&D specialist before the project is finalized; the strategy is far stronger when it's built in than reconstructed from invoices afterward, and the best providers do the heavy lifting with your contractors directly.

•        If you completed facility work in 2023, 2024, or 2025, those years remain open at the federal and state level — capture the credits and choose your Section 174 treatment deliberately.

•        If your 2022 facility spend was significant, file a protective claim before the statute closes this summer; this is the year with a hard deadline and the least room to wait.

A qualified firm can tell you within an hour or two whether a project carries meaningful credit potential. Yes, everyone is busy. But the window here is narrow, and narrow windows close.

The Inflection Point

Section 280E did more than overtax this industry. It pulled capital out of facilities, products, and people and sent it to the Treasury, year after year, for work that was never criminal and was always innovative. That structural drag is lifting.

What replaces it is a choice. The operators who treat this moment as a chance to exhale will do fine. The operators who treat it as a chance to build — who structure their expansions to capture R&D credits and Section 174 treatment, preserve their open years, and move before the windows close — are the ones who will look back on 2026 not as the year the pressure came off, but as the year their business finally compounded. That is what leadership in this field will look like. The tax code is, for once, on your side. Make full use of it.

Author Information

Rick Kleban is the founder and president of Sycamore Growth Group. He also advocates at the federal and state levels to improve the credit to better incentivize innovation, which, in turn, helps communities grow the tax base.

James Bean, CPA, is a senior researcher and R&D tax controversy specialist at Sycamore Growth Group.

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, specializing in assisting businesses in obtaining and substantiating R&D tax credits and resolving tax controversies.

Sycamore Growth Group is an Ohio-based firm specializing in federal and state research & development tax credits by providing elite written substantiation and legal analysis for credit claims.