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