How Cannabis Businesses Should Prepare for a Potential End to 280E

The recent presidential executive order directing federal agencies to
expedite the process for reclassifying cannabis marks a significant moment
for the industry. For operators, investors, and advisors who have been
navigating regulatory uncertainty for years, federally reclassifying the
plant could bring major benefits.

But it is important to separate what the executive order actually did from
what many hope it will do.
*Key insights*

- Rescheduling eventually could remove cannabis from Section 280E, but
it has not happened yet.
- Operators should not make structural or tax changes based on
anticipated relief alone.
- Retroactive tax refunds for prior 280E years are unlikely.
- Defensible cost accounting and strong documentation remain critical
right now.
- The smartest strategy is disciplined compliance today and scenario
planning for tomorrow.

Rescheduling could meaningfully change the tax landscape for cannabis
businesses, particularly with respect to Internal Revenue Code Section 280E,
but it won’t eliminate compliance complexity, and it won’t provide
immediate relief. Understanding the difference is crucial for operators
planning their next move.
Why the executive order matters … — and why nothing has changed yet

The executive order directs federal agencies to complete the process of
moving cannabis from Schedule I to Schedule III under the Controlled
Substances Act. That’s an important step, because Schedule I
classification, reserved for substances deemed to have no accepted medical
use and high potential for abuse, is the legal basis for the punitive tax
treatment cannabis businesses currently face under Section 280E.

However, an executive order alone cannot finalize rescheduling. The Drug
Enforcement Administration (DEA) must complete the formal rulemaking
process, which includes review, public comment, and potential legal
challenges. That process takes time, and timelines remain uncertain.

Until final rules are published in the Federal Register and take effect,
cannabis remains a Schedule I substance for federal tax purposes. In other
words, nothing has changed yet from a compliance standpoint.

Operators should resist the temptation to make immediate structural or tax
changes based on anticipated relief. Planning should be deliberate, not
reactive.
What the end of 280E would really mean for cannabis operators

If cannabis ultimately is moved to Schedule III, the most consequential
change for operators would be the elimination of Section 280E.

This section of the federal tax code, enacted in 1982, prohibits businesses
trafficking in Schedule I or II substances from deducting ordinary and
necessary business expenses. As a result, cannabis operators often pay
federal tax on gross income rather than net profit. While cost of goods
sold (COGS) remains deductible, indirect expenses such as payroll, rent,
marketing, professional services, and interest generally are not.

The impact on effective tax rates can be dramatic, often pushing them well
above 70 percent.

Reclassifying cannabis to Schedule III would remove the plant and its
products from the scope of 280E. That would allow operators to:

- Deduct ordinary and necessary operating expenses.
- Utilize standard business credits.
- Improve cash flow through lower effective tax rates.
- Align tax reporting more closely with other industries.

For multistate operators in particular, the cash-flow implications could be
transformative. Lower federal tax burdens could free up capital for
reinvestment, debt reduction, expansion, or operational improvements.

However, the relief likely would apply prospectively, not retroactively.
Why retroactive 280E tax relief is unlikely

One of the most common questions I hear is, “Will rescheduling allow
operators to amend prior returns and recover taxes paid under 280E?”

The answer is almost certainly no.

Section 280E applies based on the law in effect during the applicable tax
year. For years during which cannabis is classified on Schedule I, tax
liabilities are determined using Section 280E rules. Rescheduling would not
rewrite history.

While limited planning opportunities may exist depending on a company’s
structure, accounting methods, or open tax years, broad retroactive refunds
are unlikely.

That makes it even more important for operators to ensure current 280E
calculations are accurate, defensible, and well-documented. The Internal
Revenue Services continues to scrutinize cannabis businesses, and
rescheduling will not eliminate audit risk for prior periods.
What rescheduling will not change

Even if cannabis moves to Schedule III, operators will still face:

- State-by-state regulatory complexity.
- Ongoing compliance with federal and state reporting requirements.
- Banking and capital access constraints (though potentially eased).
- Heightened scrutiny from regulators and tax authorities.

Rescheduling is a regulatory and tax shift, not full federal legalization.

Companies will continue to operate in a highly regulated environment and
should expect continued oversight.
Five practical steps to take now

While timing remains uncertain, cannabis businesses can take proactive
steps to position themselves for a potential transition.
Strengthen current 280E compliance

Ensure cost accounting methodologies are properly applied and documented.
Defensible COGS calculations are critical in the event of an audit.
Model future scenarios

Work with advisors to project post-280E cash flow. Understanding how tax
savings could impact debt service, expansion plans, and capital structure
allows operators to plan strategically rather than reactively.
Evaluate entity structure

Some structures were built specifically to mitigate 280E exposure. If 280E
no longer applies, those structures may need to be revisited for efficiency
and simplicity.
Prepare for IRS scrutiny

The IRS Large Business & International Division has identified cannabis as
an area of focus. Good documentation today protects businesses tomorrow,
regardless of rescheduling outcomes.
Avoid premature changes

Do not implement structural or accounting changes based on anticipated
relief until the rule is finalized. Acting too early can create unintended
tax consequences.
Prepare carefully, not prematurely

The executive order signals progress. For an industry that has operated
under tax rules designed for illicit trafficking rather than regulated
commerce, the potential elimination of Section 280E would represent a
fundamental shift.

But rescheduling is not automatic, and it is not retroactive.

Operators who remain disciplined by maintaining compliance today while
preparing thoughtfully for tomorrow will be best positioned to capitalize
on the opportunity if and when Schedule III becomes reality.

In an industry defined by regulatory change, patience and preparation
remain two of the most valuable assets.
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[image: Kristin Kowalski CPA Bonadio Group]

Kristin Kowalski, CPA, is a partner in The Bonadio Group’s tax practice and
the co-leader of the firm’s cannabis and industrial hemp team. For more
than a decade, she has provided tax compliance, consulting, and advisory
services to multistate corporations and flow-through clients in the
manufacturing, technology, service, and real estate industries. Based in
New York, her areas of technical expertise include inbound international
organizations, tax credits, accounting for income taxes, and transaction
planning.