In the last year or two, we have seen a growing number of marijuana businesses take the position that IRC 280E no longer applies to them. Some of these businesses have taken that position in consultation with lawyers and CPAs. This shift in strategy predates Trump’s Executive Order of December 18, 2025, to reschedule marijuana under the federal Controlled Substances Act (CSA). In any case, I believe this is a misreading of the law and a dangerous position for these businesses to take.
What is IRC 280E?
IRC 280E is a federal tax provision that prohibits businesses engaged in the “trafficking” of Schedule I or Schedule II controlled substances from deducting ordinary and necessary business expenses on their federal tax returns. This rule applies to state-legal marijuana businesses, and it forces many of them to pay federal income tax on gross income (revenue minus cost of goods sold) rather than net income (profit). It’s harder on some businesses than others, but overall IRC 280E is a scourge for any marijuana taxpayer.
Has IRC 280E been challenged?
Yes, cannabis businesses have challenged the law repeatedly over the past decade or so, on constitutional and “as applied” grounds. We have supported those efforts, including in litigation brought by clients of this law firm. Still, I’ve explained that “except for Champ v. Commissioner, no cannabis taxpayer has won an IRC 280E case (and there have been a bunch of them).”
I stand by the statement, while acknowledging that parties have achieved limited successes via COGS adjustments and refund requests. Overall, though, courts have consistently upheld the validity of IRC 280E as applied to marijuana businesses, and they have cast aside every constitutional challenge to date. It’s just a very difficult situation.
The current litigation to watch is a tax court case known as New Mexico Top Organics, Inc. d/b/a Ultra Health v. Commissioner (“NMTO”), filed last October. The primary argument is that marijuana is no longer “within the meaning” of Schedule I of the CSA, despite being listed there. The case relies on a 2023 determination by the Department of Health and Human Services (HHS) that marijuana should be placed in Schedule III. It also relies on Congressional spending bills, and finally, on the proposed rescheduling that began under President Biden.
I don’t find the arguments persuasive. Without analyzing the merits, though, it’s important to note that the NMTO plaintiff is a medical marijuana business. The plaintiff is not arguing that IRC 280E doesn’t apply to generalized adult-use sales (which are most sales nationwide, at this point). It’s also important to note that any decision by the tax court could be appealed by either party to the Tenth Circuit, and a ruling likely would not grant immediate relief to anyone—let alone non-litigants.
What advice are marijuana businesses getting these days on IRC 280E?
I’d like to think that most of advice is along the lines of what we tell our clients, viz. that marijuana is still a Schedule I controlled substance, unfortunately, and IRC 280E still applies. And I think that is what a clear majority of attorneys and CPAs are saying. That said, we’ve seen outlying and aggressive advice from professionals on whether marijuana businesses are still subject to IRC 280E, and even on whether marijuana remains in Schedule I (it does). Here’s a prominent example:
I’m not sure what the law firm there was thinking, and to be fair, they deleted the post following my comment. On the CPA side, the position I first vetted last year parrots the arguments in NMTO. The CPA I spoke with argued that marijuana is no longer “within the meaning of Schedule I” (despite its placement there), and that NMTO’s arguments apply equally to income from adult-use sales. The kindest thing I can say, euphemistically, is that it’s an interesting position.
What does the IRS say? What about Congress?
In June of 2024, following the HHS recommendation that marijuana be moved to Schedule III, the IRS published a memo titled “Marijuana remains a Schedule I controlled substance; IRC 280E still applies.” The Service stated that this would be true “until a final federal rule is published.” That never happened under the Biden administration’s flawed rescheduling process, and still hasn’t occurred following Trump’s executive order.
For good measure, the IRS followed on its memo six months later with another straight-ahead publication, observing that “some taxpayers have taken the position of disregarding the section 280E limitation using a variety of rationales that do not constitute reasonable basis.” The term “reasonable basis” is a relatively high standard of tax reporting (see 26 CFR 1.6662-3(b)(3)), and a myriad of penalties may ensue where the standard is not met. Straight talk.
For its part, Congress has failed to pass legislation to nullify the effects of IRC 280E, and every bill to de- or reschedule marijuana has ultimately failed. However, the Congressional Research Service, which I like, issued relevant guidance on IRC 280E earlier this month. The February 6 report is titled: “The Application of Internal Revenue Code Section 280E: Selected Legal Issues.” Notwithstanding the IRS publications discussed above, the CRS report maintains there is “little tax guidance concerning the application of Section 280E.” It then discusses a series of proposals that, if enacted, “would no longer prohibit marijuana businesses from taking deductions and credits.” In other words, without the enactment of any of these proposals, IRC 280E still applies.
Conclusion
I’m sure any business paying tax on gross receipts would love to enjoy the same deductions as other U.S. taxpayers. For this reason, and because certain advisors have jumped the shark with rescheduling in the air, we’ve seen more cannabis businesses filing returns that ignore IRC 280E. We’ve also had clients file amended returns seeking refunds for taxes paid under the IRC 280E regime, contrary to IRS warnings (not to give anyone any ideas!). Some of these refunds have been processed, and our best advice is “set that cash aside, at least through the audit window.”
Let’s hope the rules change for tax year 2026, and that the Department of Justice picks up the ball with President Trump’s rescheduling order. Specifically, let’s hope for a final rule, or better. For now, though, I believe the correct advice is that IRC 280E still applies to marijuana businesses. Unfortunately.
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