Within the final yr or two, we now have seen a rising variety of marijuana companies take the place that IRC 280E now not applies to them. A few of these companies have taken that place in session with legal professionals and CPAs. This shift in technique predates Trump’s Executive Order of December 18, 2025, to reschedule marijuana below 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 price of products offered) moderately 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. Now we have supported those efforts, together with in litigation introduced by shoppers of this legislation agency. Nonetheless, I’ve explained that “aside 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. Total, although, courts have persistently upheld the validity of IRC 280E as utilized to marijuana companies, and so they have solid apart each constitutional problem so far. It’s only a very tough state of affairs.
The present litigation to look at is a tax court docket case generally known as New Mexico Top Organics, Inc. d/b/a Ultra Health v. Commissioner (“NMTO”), filed final October. The first argument is that marijuana is now not “throughout the which means” of Schedule I of the CSA, regardless of being listed there. The case depends on a 2023 determination by the Department of Health and Human Services (HHS) that marijuana must be positioned in Schedule III. It additionally depends on Congressional spending payments, and eventually, on the proposed rescheduling that started below 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 is just not 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 determination by the tax court docket could possibly be appealed by both get together to the Tenth Circuit, and a ruling possible wouldn’t grant speedy aid to anybody—not to mention non-litigants.
What recommendation are marijuana companies getting lately on IRC 280E?
I’d prefer to suppose that almost all of recommendation is alongside the traces of what we inform our shoppers, viz. that marijuana continues to be a Schedule I managed substance, sadly, and IRC 280E nonetheless applies. And I believe that’s what a transparent majority of attorneys and CPAs are saying. That stated, 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 undecided what the legislation agency there was considering, and to be truthful, they deleted the publish following my remark. On the CPA aspect, the place I first vetted final yr parrots the arguments in NMTO. The CPA I spoke with argued that marijuana is now 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 fascinating 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 could be true “till a remaining federal rule is printed.” That by no means occurred below the Biden administration’s flawed rescheduling process, and nonetheless hasn’t occurred following Trump’s govt order.
For good measure, the IRS adopted on its memo six months later with another 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 cheap foundation.” The time period “cheap foundation” is a comparatively excessive normal of tax reporting (see 26 CFR 1.6662-3(b)(3)), and a myriad of penalties could ensue the place the usual is just not met. Straight discuss.
For its half, Congress has did not move laws to nullify the consequences of IRC 280E, and each invoice to de- or reschedule marijuana has in the end 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 Software of Inner 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 sequence of proposals that, if enacted, “would now 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 shoppers file amended returns looking for refunds for taxes paid below the IRC 280E regime, contrary to IRS warnings (and to not give anybody any concepts!). A few of these refunds have been processed, and our greatest recommendation is “set that money apart, at the least by means of the audit window.”
Let’s hope the foundations change for tax yr 2026, and that the Division of Justice picks up the ball with President Trump’s rescheduling order. Particularly, let’s hope for a remaining rule, or better. For now, although, I consider the right recommendation is that IRC 280E nonetheless applies to marijuana companies. Sadly.
