IRC 280E Still Applies to Your Marijuana Business, Unfortunately – Canna Law Blog™

Within the final 12 months or two, we now have seen a rising variety of marijuana companies take the place that IRC 280E not applies to them. A few of these companies have taken that place in session with attorneys and CPAs. This shift in technique predates Trump’s Government Order of December 18, 2025, to reschedule marijuana underneath the federal Managed Substances Act (CSA). In any case, I consider this can be a misreading of the legislation and a harmful place for these companies to take.

What’s IRC 280E?

IRC 280E is a federal tax provision that prohibits companies engaged within the “trafficking” of Schedule I or Schedule II managed substances from deducting bizarre and vital enterprise bills on their federal tax returns. This rule applies to state-legal marijuana companies, and it forces a lot of them to pay federal revenue tax on gross revenue (income minus value of products bought) quite than internet revenue (revenue). It’s tougher on some companies than others, however general IRC 280E is a scourge for any marijuana taxpayer.

Has IRC 280E been challenged?

Sure, hashish companies have challenged the legislation repeatedly over the previous decade or so, on constitutional and “as utilized” grounds. We have now supported these efforts, together with in litigation introduced by purchasers of this legislation agency. Nonetheless, I’ve defined that “apart from Champ v. Commissioner, no hashish taxpayer has gained an IRC 280E case (and there have been a bunch of them).”

I stand by the assertion, whereas acknowledging that events have achieved restricted successes through COGS changes and refund requests. General, although, courts have constantly upheld the validity of IRC 280E as utilized to marijuana companies, they usually have solid apart each constitutional problem up to now. It’s only a very troublesome state of affairs.

The present litigation to observe is a tax courtroom case generally known as New Mexico High Organics, Inc. d/b/a Extremely Well being v. Commissioner (“NMTO”), filed final October. The first argument is that marijuana is not “throughout the which means” of Schedule I of the CSA, regardless of being listed there. The case depends on a 2023 willpower by the Division of Well being and Human Companies (HHS) that marijuana must be positioned in Schedule III. It additionally depends on Congressional spending payments, and eventually, on the proposed rescheduling that started underneath President Biden.

I don’t discover the arguments persuasive. With out analyzing the deserves, although, it’s vital to notice that the NMTO plaintiff is a medical marijuana enterprise. The plaintiff isn’t arguing that IRC 280E doesn’t apply to generalized adult-use gross sales (that are most gross sales nationwide, at this level). It’s additionally vital to notice that any resolution by the tax courtroom might be appealed by both celebration to the Tenth Circuit, and a ruling seemingly wouldn’t grant speedy reduction to anybody—not to mention non-litigants.

What recommendation are marijuana companies getting lately on IRC 280E?

I’d wish to assume that the majority of recommendation is alongside the strains of what we inform our purchasers, viz. that marijuana continues to be a Schedule I managed substance, sadly, and IRC 280E nonetheless applies. And I feel that’s what a transparent majority of attorneys and CPAs are saying. That mentioned, we’ve seen outlying and aggressive recommendation from professionals on whether or not marijuana companies are nonetheless topic to IRC 280E, and even on whether or not marijuana stays in Schedule I (it does). Right here’s a distinguished instance:

I’m unsure what the legislation agency there was pondering, and to be honest, they deleted the put up following my remark. On the CPA aspect, the place I first vetted final 12 months parrots the arguments in NMTO. The CPA I spoke with argued that marijuana is not “throughout the which means of Schedule I” (regardless of its placement there), and that NMTO’s arguments apply equally to revenue from adult-use gross sales. The kindest factor I can say, euphemistically, is that it’s an attention-grabbing place.

What does the IRS say? What about Congress?

In June of 2024, following the HHS advice that marijuana be moved to Schedule III, the IRS printed a memo titled “Marijuana stays a Schedule I managed substance; IRC 280E nonetheless applies.” The Service acknowledged that this is able to be true “till a closing federal rule is printed.” That by no means occurred underneath the Biden administration’s flawed rescheduling course of, and nonetheless hasn’t occurred following Trump’s government order.

For good measure, the IRS adopted on its memo six months later with one other straight-ahead publication, observing that “some taxpayers have taken the place of disregarding the part 280E limitation utilizing a wide range of rationales that don’t represent affordable foundation.” The time period “affordable foundation” is a comparatively excessive normal of tax reporting (see 26 CFR 1.6662-3(b)(3)), and a myriad of penalties might ensue the place the usual isn’t met. Straight discuss.

For its half, Congress has didn’t move laws to nullify the results of IRC 280E, and each invoice to de- or reschedule marijuana has finally failed. Nevertheless, the Congressional Analysis Service, which I like, issued related steering on IRC 280E earlier this month. The February 6 report is titled: “The Utility of Inside Income Code Part 280E: Chosen Authorized Points.” However the IRS publications mentioned above, the CRS report maintains there may be “little tax steering regarding the software of Part 280E.” It then discusses a collection of proposals that, if enacted, “would not prohibit marijuana companies from taking deductions and credit.” In different phrases, with out the enactment of any of those proposals, IRC 280E nonetheless applies.

Conclusion

I’m positive any enterprise paying tax on gross receipts would like to take pleasure in the identical deductions as different U.S. taxpayers. For that reason, and since sure advisors have jumped the shark with rescheduling within the air, we’ve seen extra hashish companies submitting returns that ignore IRC 280E. We’ve additionally had purchasers file amended returns looking for refunds for taxes paid underneath the IRC 280E regime, opposite to IRS warnings (to not give anybody any concepts!). A few of these refunds have been processed, and our greatest recommendation is “set that money apart, a minimum of by means of the audit window.”

Let’s hope the principles change for tax 12 months 2026, and that the Division of Justice picks up the ball with President Trump’s rescheduling order. Particularly, let’s hope for a closing rule, or higher. For now, although, I consider the right recommendation is that IRC 280E nonetheless applies to marijuana companies. Sadly.