White Paper:
Cannabis Rescheduling and Section 280E

‍Executive Summary

For decades, Section 280E of the Internal Revenue Code has operated as an invisible tax multiplier on state-licensed cannabis businesses. By disallowing deductions for ordinary operating expenses, Section 280E pushes effective tax rates to 60 percent, 70 percent, and beyond. On April 23, 2026, the U.S. Department of Justice took an extremely consequential federal cannabis policy action, signing a two-phase order to reclassify cannabis from Schedule I to Schedule III of the Controlled Substances Act. Phase 1 takes effect immediately for state-licensed medical cannabis operators. (That Phase 1 draws a bright line between medical licenses and state-sanctioned adult-use licenses is significant.) Phase 2, a formal administrative hearing, commences June 29, 2026, with a final rule expected as early as fall of 2026. Litigation is expected and the outcome of the hearings is unknown.

The industry at large is optimistic that moving cannabis to Schedule III classification will mean Section 280E of the tax code ceases to apply by its own terms. This would mean, for the first time, state-licensed cannabis operators will be able to deduct rent, payroll, insurance, marketing, and all other ordinary business costs deducted by any other legitimate industry in the United States. For a mid-size operator generating $10 million in annual revenue, that could mean $1 million or more in additional after-tax cash each year. At the scale of a multi-state operator, the numbers are dramatically larger.

This paper explains what happened, what it means in financial terms, what it does not do, and how forward-thinking operators are already thinking about what to do with capital that 280E has long consumed.

Note: This white paper reflects the state of federal cannabis rescheduling as of April 28, 2026, based on Federal Register filings published on that date. The rescheduling process is active and ongoing. This document is for educational purposes only and does not constitute legal, tax, or investment advice. Consult qualified legal and tax counsel regarding the impact of rescheduling on your specific business.

The Tax That Defined an Industry

The story of Section 280E begins not in a dispensary but in a courtroom. In 1981, a federal court ruled that Jeffrey Edmondson, who had been convicted for selling cocaine, amphetamines, and cannabis, could deduct ordinary business expenses under the Internal Revenue Code. Congress responded by enacting Section 280E in 1982, closing what it viewed as an unconscionable loophole. The provision is blunt: no deduction or credit shall be allowed for amounts paid in carrying on any trade or business that consists of trafficking in controlled substances listed on Schedule I or Schedule II of the Controlled Substances Act.

The drafters of 280E could not have imagined that four decades later, more than half the states in the country would be home to licensed, regulated, tax-paying cannabis businesses employing hundreds of thousands of workers and generating tens of billions in legal revenue, and that all of them would still be subject to the same provision written to punish drug traffickers like Jeffrey Edmondson.

Under 280E, cannabis operators may deduct their cost of goods sold — the direct cost of producing their products — under IRC Section 471. Everything else is disallowed: rent, payroll, insurance, marketing, professional fees, and virtually every other cost of running a legitimate business. The result is a tax base with no resemblance to the operator’s actual economic income.

The math is severe. Consider a mid-size operator with $10 million in revenue. After $5 million in cost of goods sold, operating expenses of $4 million leave actual economic profit of $1 million. Under 280E, taxable income is $5 million, which is five times actual profit. At a 30 percent blended federal and state rate, their tax bill is $1.5 million. They owe 150 percent of what they actually earned.

This is not a hypothetical. Among publicly traded multi-state operators, it has been routine to find companies disclosing significant income tax expenses in the same years they reported net losses — taxes owed not on profit, but on revenue that 280E refuses to let operators offset with their legitimate business costs. Harborside Health Center, one of California’s oldest dispensaries, became the subject of a landmark Tax Court case (Patients Mutual Assistance Collective Corporation v. Commissioner) in which the IRS assessed millions in additional taxes, illustrating how the provision has functioned as a structural penalty against the industry’s most established operators.

Recent court filings reveal the scale of the problem among the country’s largest cannabis companies. Trulieve Cannabis carries $630.3 million in contested 280E tax liability. Curaleaf Holdings faces $531.5 million. Verano Holdings owes $378.3 million. Cresco Labs owes $171.4 million. Combined, these four companies alone face more than $1.7 billion in disputed federal tax liability — owed not on profit, but on revenues that 280E refuses to let them shelter with their ordinary costs of business. These companies would face intense pressure to pursue restructuring or insolvency proceedings if compelled to pay in full, which is why the fight over 280E is existential for much of the publicly traded industry.

As explained by Rep. Earl Blumenauer (D-OR), co-founder of the Congressional Cannabis Caucus, in August 2024: “Cannabis businesses cannot, under the terms of an IRS provision known as 280E, deduct their regular, normal operating expenses for tax purposes.” He continued: “It means that virtually all of the state-legal enterprises are money-losing… All of those marginal operations, most of which are money-losing, become money-making because they’re not paying two or three times as much [tax] as a normal business would.”

A Historic Shift: What Happened and When

The push to reschedule cannabis has been building for years. The pace of federal action accelerated dramatically beginning in 2024 and reached an inflection point in April 2026.

May 2024: The Proposed Rule

The Department of Justice published a Notice of Proposed Rulemaking in the Federal Register (89 FR 44597), formally proposing to move cannabis from Schedule I to Schedule III. The proposal followed a 2023 recommendation by the Department of Health and Human Services, which concluded that cannabis has accepted medical uses and lower abuse potential than Schedule I or II substances. The DEA received approximately 43,000 public comments.

Late 2024 – Early 2025: The Hearing Stalls

The DEA scheduled a formal administrative hearing to begin December 2, 2024. In January 2025, proceedings were stayed by an administrative law judge following allegations of improper communications between the prior administration’s DEA and pro-rescheduling parties. The presiding ALJ subsequently retired. The stay remained in effect for over a year.

December 2025: The Trump Executive Order

President Trump signed Executive Order 14370, “Increasing Medical Marijuana and Cannabidiol Research,” directing the Attorney General to complete the rescheduling rulemaking “in the most expeditious manner in accordance with Federal law.” The order gave the stalled process new, explicit momentum.

April 23, 2026: The Two-Phase Order

Acting Attorney General Todd Blanche signed a two-phase rescheduling order.

Phase 1 is immediate. Under treaty authority, the order administratively reclassifies state-licensed medical cannabis and FDA-approved cannabis products from Schedule I to Schedule III, effective now. This creates an immediate legal basis for arguing that 280E no longer applies to medical cannabis operators. Cannabis tax attorneys are actively advising clients on tax implications, pending formal IRS guidance.

Phase 2 is the formal rulemaking. A new expedited administrative hearing is scheduled for June 29 through July 15, 2026. This hearing will establish the record supporting a final rule that provides legally durable, full-spectrum rescheduling across all cannabis businesses, including adult-use operators. It is important to note that litigation is expected and the outcome of the final ruling, which is expected as early as fall 2026, is unclear.

April 28, 2026: Federal Register Action

The DEA published two companion Federal Register notices (91 FR 22777 and 91 FR 22778) formally withdrawing the Biden-era hearing proceedings and announcing the June 29 hearing. As of this writing, the rescheduling process is on an expedited track with a public timeline and a defined endpoint.

What Rescheduling Does — and What It Doesn’t

Understanding precisely what rescheduling delivers, and where its limits are, is essential for any operator making planning decisions right now.

What It Does

Phase 1's immediate reclassification creates a legal argument that Section 280E no longer applies to state-licensed medical cannabis operators — and only medical operators. Adult-use commerce remains explicitly in Schedule I under the April 23 order. The full elimination of 280E across all cannabis businesses would require a completed final rule, which is the purpose of the June 29 hearing. When a final Schedule III rule takes legal effect, all cannabis operators — medical and adult-use alike — would for the first time be able to deduct rent, payroll, insurance, marketing, and all other ordinary business expenses under IRC Section 162, gaining full parity with every other legal industry in the United States. That outcome, however, is not yet law.

Phase 1 also creates an immediate legal argument for 280E relief for state-licensed medical cannabis operators. The Acting AG’s April 23 order explicitly encouraged the Treasury Department to consider providing retroactive relief from 280E liability for taxable years in which state licensees operated under a medical cannabis license. This recommendation carries significant financial implications.

In practical terms, this could mean the IRS publishing guidance that allows qualifying operators to file amended tax returns for prior years and receive refunds on excess taxes paid under 280E. For an operator who paid $500,000 or more per year in taxes attributable to 280E over a three-year period, that guidance could translate to a seven-figure refund. For multi-state operators, the numbers would be substantially larger. Medical operators stand on stronger legal footing than adult-use-only operations, which creates some complexity for mixed-license MSOs holding both medical and recreational authorizations. This is a meaningful signal, but until the IRS publishes formal guidance confirming eligibility, the years covered, and the filing process, operators should not take action on prior-year returns without advice from qualified cannabis tax counsel.

Operators should also understand that the IRS’s current posture is adversarial, not conciliatory. The agency has been actively litigating 280E challenges in Tax Court and has given no public indication it intends to soften its enforcement stance pending rescheduling. Any planning that assumes retroactive refunds will be available should be treated as speculative until the IRS formally acts.

Critically, Phase 1’s reclassification is medical-only. Adult-use recreational cannabis remains explicitly in Schedule I under the April 23 order. Operators whose business is primarily or entirely adult-use commerce have no 280E relief under Phase 1. That relief requires a completed, legally effective final rule — which is the purpose of the June 29 hearing and the rulemaking that follows.

What It Doesn’t Do

Rescheduling does not federally legalize cannabis. Cannabis will remain a controlled substance. Possession, distribution, and sale outside of state-licensed frameworks remain federal crimes. Interstate commerce in cannabis remains prohibited under federal law. These are separate matters that would require congressional action.

Rescheduling alone does not solve the banking access problem. The SAFER Banking Act and similar legislation remain stalled in Congress. Federally chartered financial institutions are unlikely to rush into the cannabis market on the basis of rescheduling alone. For operators currently licensed in legal states, the unchanged state regulatory framework is largely reassuring because your state-issued licensing remains valid, and your existing compliance obligations stay exactly as they are. What rescheduling does not do, however, is open cannabis commerce in states where it is currently illegal. Texas, Georgia, Idaho, and the roughly 20 other states without legal cannabis programs are unaffected. Operators with expansion plans targeting currently-illegal states will still need state-level reform in those states; federal rescheduling does not compel them to act.

What to Watch: The Timeline

The June 29 – July 15, 2026 hearing will establish the administrative record supporting the final rule, which is expected in late summer or fall 2026. If classified as a “major rule” under the Congressional Review Act — which most analysts consider likely — it will be subject to a 90-day waiting period and a potential congressional review window before taking effect.

Anti-rescheduling advocates, led by Smart Approaches to Marijuana (SAM) and represented by former U.S. Attorney General Bill Barr, have publicly signaled their intent to seek judicial relief once a final rule is published. An injunction could delay the effective date indefinitely. And the IRS has issued no formal guidance confirming a change in 280E applicability as of this writing. Until such guidance arrives, operators should not change their tax positions without advice from qualified cannabis tax counsel.

The Financial Opportunity: What 280E Relief Means in Dollars

The potential impact of 280E elimination varies by operator size, cost structure, and state. The table below illustrates the projected tax impact across three operator profiles, using illustrative figures. Assumptions: 50 percent cost of goods sold; operating expenses at 40 percent of revenue; 30 percent blended federal and state effective tax rate; corporate structure. Actual results will vary.

Illustrative only. Assumes 50% COGS, 40% operating expenses, 30% blended federal/state effective tax rate, corporate structure. Actual results will vary. Not tax advice.

Two patterns stand out. First, the effective tax rate under 280E is proportionally debilitating at every scale. Second, the absolute dollar savings grow dramatically with size. For a large multi-state operator, 280E elimination may represent $10 million or more in annual after-tax capital that can be redirected to growth, debt service, or strategic investment. For the first time in the history of the legal cannabis industry, operators at every scale will have financial resources comparable to businesses in other legal industries.

More Cash. The Same Risk Landscape.

The relief coming from 280E elimination will be transformative for the industry. It does not, however, change the underlying risk environment that cannabis operators navigate every day.

The surplus and excess-and-surplus insurance market serving cannabis — the only market willing to write coverage for most operators — will not be immediately reshaped by a rescheduling rule. Premium rates in the cannabis space run three to five times higher than comparable industries, driven not by federal scheduling status but by the industry’s concentration of unique and unresolved risks: product liability and recall exposure, business interruption vulnerability, cash-intensive operations, and the persistent challenges around banking. Traditional insurers who have long avoided cannabis will not rush back simply because a rule is published.

The recall environment, to take one concrete example, is accelerating rather than easing. California issued 63 mandatory product recalls in 2024, compared to three per year in 2022 and 2023. Colorado saw 17 recalls in 2025, affecting 465 retail locations across the state. Missouri recalled nearly 50,000 products in a single enforcement action tied to laboratory irregularities. The regulatory and litigation exposure from a significant recall event can reach $500,000 to $2.4 million or more for a mid-size operator, and it has nothing to do with federal scheduling status.

What rescheduling does change is the capital available to address that risk.

For years, one of the most effective risk management tools available to businesses in other industries has been largely inaccessible to cannabis operators: the captive insurance company. A captive is a licensed insurance company owned and operated by the business it insures. Rather than paying premiums to a third-party carrier — premiums that fund that carrier’s profit — the business directs that capital to its own licensed entity. Premiums are paid into the captive, claims are paid from it, and over time, well-run captives accumulate surplus, earn investment income, and return underwriting profit to their owner. Coverage can be structured around the operator’s actual risk profile, including product recall, business interruption, and liability exposures that commercial cannabis policies routinely exclude or price prohibitively.

Captive formation requires meaningful capitalization. For many cannabis operators, that capital has been consumed every year by an outsized 280E tax bill. For the first time, 280E relief will give a meaningful segment of the industry the financial capacity to consider captive insurance seriously. The operators best positioned to benefit are those with significant premium spend, healthy operating margins, genuine frustration with coverage gaps, and a long-term view of their business. Those are the same operators for whom 280E has been most acutely painful.

The relief coming from rescheduling isn’t just an opportunity to grow. For those who deploy it strategically, it is an opportunity to build a more resilient business.

What to Watch: The Road Ahead

The next 90 to 180 days will be among the most consequential in the history of U.S. cannabis policy. Here is what operators and their advisors should be monitoring.

The June 29 – July 15, 2026 Hearing. This is the formal administrative proceeding that will establish the record supporting the final rescheduling rule. All parties wishing to participate must submit written notice to the DEA by May 28, 2026. The hearing is scheduled to conclude no later than July 15.

The Final Rule. Expected in late summer or fall 2026, this is the legally durable instrument that will move cannabis to Schedule III across all business types. If classified as a major rule, it will be subject to a 90-day waiting period and potential congressional review before taking legal effect.

IRS Guidance. Until the IRS issues a formal Notice, Revenue Ruling, or other published guidance confirming a change in 280E applicability, operators should not alter their tax positions without qualified cannabis tax counsel. The IRS’s current posture provides a clear caution: in New Mexico Top Organics v. Commissioner, a Tax Court case in which the IRS recently filed its first formal written response to industry arguments challenging 280E applicability, legal observers have noted the taxpayer faces long odds. The agency has shown no inclination to soften its enforcement stance pending rescheduling. Additionally, operators who take aggressive positions on 280E non-applicability without adequate legal support risk a 20 percent substantial understatement penalty under IRC Section 6662 — a penalty the IRS is expected to pursue particularly against larger, well-counseled operators who cannot demonstrate reasonable cause and good faith. The Acting AG’s recommendation that Treasury consider retroactive relief is an encouraging signal, not a guarantee.

Litigation. Smart Approaches to Marijuana (SAM), represented by former U.S. Attorney General Bill Barr, has publicly signaled its intent to seek judicial relief once a final rule is published. An injunction could delay the effective date, potentially for a significant period.

Banking Access. Rescheduling alone does not resolve the banking access problem. The SAFER Banking Act remains stalled in Congress. Meaningful improvement in financial services access will require separate legislation.

State Law. State cannabis licensing, testing, and regulatory frameworks are unaffected by federal rescheduling. Operators should not assume rescheduling changes their state tax obligations or state-level compliance requirements.

State Tax Policy. As 280E elimination would create meaningful new after-tax margin for cannabis operators, some states may view this as an opportunity to increase state-level cannabis taxes — reasoning that operators just received a significant federal windfall. The concern is legitimate and worth monitoring. The powerful counterforce is the illicit market. Every legal cannabis state has learned, some of them painfully, that high taxes drive price-sensitive consumers back to illegal sources that pay no taxes at all. California was compelled to reduce its cannabis cultivation tax in part because excessive taxation was eroding the legal market’s ability to compete with unlicensed operators. The illicit market functions, in effect, as a ceiling on how far states can realistically push tax rates before they damage the very legal industry they depend on for revenue. That does not mean states won’t try. It means the economic and political constraints on aggressive state tax increases are real. Operators should track state legislative sessions carefully in the 12 to 18 months following federal rescheduling.

Moving Forward

Relief is likely, although timing and scope remain uncertain. This is good news for every cannabis business owner who has watched a meaningful portion of their actual income disappear into a tax provision written for drug traffickers. The fundamental economics of operating a state-licensed cannabis business are about to change in ways that practitioners in this industry have been waiting years to see.

With that relief comes the question of what to do with it. Growth is the obvious answer. But the operators who build lasting businesses will use this moment for more than expansion — they will use it to finally build the risk infrastructure that the crushing economics of 280E have made nearly impossible until now.

3F Captive Services offers a complimentary, no-obligation review of your current insurance coverage. We will show you exactly where your protection is solid and the coverage shortfalls that the commercial cannabis market routinely leaves unaddressed, including any red flags. There is no commitment required and you will get a clear picture of where you actually stand, and what it would take to own your risk rather than rent it.

The capital that 280E has consumed is coming back. How you deploy it will define the next chapter of your business.

Sources

1. U.S. Department of Justice / Drug Enforcement Administration. Notice of Proposed Rulemaking, 89 FR 44597. Federal Register, May 21, 2024.

2. Drug Enforcement Administration. Notice of Hearing, 89 FR 70148. Federal Register, August 29, 2024.

3. Executive Order 14370, “Increasing Medical Marijuana and Cannabidiol Research,” 90 FR 60541. Federal Register, December 23, 2025.

4. Drug Enforcement Administration. Schedules of Controlled Substances: Rescheduling of Marijuana; Withdrawal, 91 FR 22778, Document No. 2026-08178. Federal Register, April 28, 2026.

5. Drug Enforcement Administration. Schedules of Controlled Substances: Rescheduling of Marijuana, 91 FR 22777, Document No. 2026-08177. Federal Register, April 28, 2026.

6. Rep. Earl Blumenauer (D-OR). Interview, The Wall Street Journal, August 27, 2024.

7. Patients Mutual Assistance Collective Corporation v. Commissioner of Internal Revenue, TC Memo. 2018-128. U.S. Tax Court.

8. Cannabis Business Times. “Trump DOJ Moves to Reschedule Cannabis, Orders New Expedited Hearing.” April 23, 2026.

9. Cannabis Business Times. “The Biggest Things About Schedule III You Haven’t Thought Of” (Vicente LLP). April 27, 2026.

10. Internal Revenue Service. Cannabis Industry guidance page. IRS.gov. Accessed April 28, 2026.

11. Internal Revenue Code § 280E; Internal Revenue Code § 471 (cost of goods sold deductibility).

12. Jason Klimek and James Mann, Harris Beach Murtha. “Why Marijuana Rescheduling Means Only Limited Tax Relief for Cannabis Businesses.” MJBizDaily, April 2026.

13. New Mexico Top Organics v. Commissioner of Internal Revenue. U.S. Tax Court (pending).

14. Internal Revenue Code § 6662 (substantial understatement penalties).