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With the April filing deadline for 2025 tax returns fast approaching, cannabis companies must once again confront the burden of Section 280E of the Internal Revenue Code (“Section 280E”). Despite significant developments over the past year — including a landmark executive order from President Trump and new litigation in which the IRS has, for the first time, laid out its substantive legal reasoning for maintaining that state legal cannabis remains “within the meaning” of Section 280E — the analysis for taxpayers remains much the same. However, whether substantively or psychologically, these recent developments add to the calculus of how taxpayers should confront Section 280E. Below, we summarize the key developments cannabis taxpayers should be aware of as they prepare their 2025 returns.
Background: Section 280E and the Cannabis Industry
As we have discussed in previous posts, Section 280E provides that "[n]o deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Because cannabis currently remains listed as a Schedule I controlled substance under the Controlled Substances Act ("CSA"), the IRS has consistently maintained that Section 280E applies to state-licensed cannabis businesses, dramatically increasing their effective tax rates.
Nonetheless, Cannabis companies are increasingly taking “non-280E” positions on their current year federal income tax returns, while many have amended prior years’ returns to reflect this position. This is done through one or more of the following strategies:
- Amending prior year returns
- Taking the position on current year returns and/or prospectively
- Filing a protective claim
A prerequisite to taking a “non-280E” position is a tax opinion, issued by a law firm, that reaches the conclusion that if the taxpayer takes a “non-280E” position on a tax return and the IRS challenges the position, the taxpayer would have at least a “reasonable basis” to defend the position before a court. To reach a “reasonable basis”, the position, as a legal matter considering all relevant precedent, must be more than “merely colorable” or “merely arguable.” The position must be “reasonably based” on supporting authorities, whether or not those authorities have substantial weight compared to contrary authorities. Taxpayers are monitoring recent developments in light of this standard. We discussed the arguments that taxpayers are setting forth as reasonable bases in:
- Past webinars and the accompanying slides;
- An appearance by Cannabis group Co-Chair Jesse Alderman on the High Functioning Podcast; and
- A joint presentation by Alderman and Tax practice Chair Kip Cawley with MGO Accounting experts.
The IRS Answering Brief in New Mexico Top Organics
In a significant litigation development, the IRS filed its answering brief on March 6, 2026, in New Mexico Top Organics Inc., d/b/a Ultra Health v. Commissioner of Internal Revenue, Docket No. 19661-24, before the United States Tax Court. This brief is noteworthy because it marks the first time that the IRS has set forth its substantive legal reasoning for determining that cannabis remains "within the meaning" of Schedule I of the CSA for purposes of Section 280E, and for rebutting arguments that Section 280E does not apply. Previously, when addressing the question of whether Section 280E continues to apply to cannabis businesses — most notably in a Fact Sheet and Information Release issued in 2024 — the IRS simply rejected contrary positions without providing any substantive analysis or reasoning to support its conclusions.
The IRS's brief advances several principal arguments, a couple of which we discuss here:
The IRS argues that the petitioner's reading of the phrase "within the meaning of" would require the Tax Court to independently evaluate whether marijuana satisfies the scheduling criteria under the CSA. The taxpayer argues that the Department of Health and Human Services has already done this when it published its Recommendation to reschedule cannabis to Schedule III under the CSA, finding, among other things, that based on medical and scientific research that cannabis has currently accepted medical use in treatment (a Schedule I controlled substance, under the CSA’s definition, must have no accepted medical use).
The IRS also argues that certain canons of statutory construction require the Tax Court to read Section 280E and the CSA “harmoniously,” while the taxpayers argue that Congress used different language in the two statutes (“within the meaning” versus “listed” or “scheduled”) so that the statutes would have different meanings. In this case, a substance can no longer be “within the meaning” of Section 280E, even though the lengthy and complex process for changing that substance’s meaning is still underway.
President Trump's Rescheduling Executive Order
Perhaps the most significant development since last year's tax filing deadlines is President Trump's Executive Order directing the rescheduling of marijuana from Schedule I to Schedule III of the CSA. The Executive Order, which directed the Attorney General to "take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner," is welcome news for the cannabis industry. Importantly for the reasonable basis analysis, it also — at least tacitly — affirms the HHS’ previous findings that cannabis has currently accepted medical use in treatment.
If and when a final rescheduling rule is published — and if it survives any judicial challenges that may follow — rescheduling would provide long-awaited certainty that cannabis businesses are no longer subject to Section 280E. In addition, rescheduling could open the door for cannabis companies to claim other federal tax credits and benefits that have previously been unavailable as a practical matter under the weight of Section 280E.
However, it is important for cannabis taxpayers to understand that the rescheduling rule is not yet final. The IRS itself acknowledged in its New Mexico Top Organics brief that "[n]otwithstanding the publication of a notice of rulemaking initiating the process to consider rescheduling marijuana under the CSA, until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of section 280E." Moreover, we believe that any final rule will only apply prospectively from the date it is published. The IRS takes a similar view, arguing that courts must "apply the law in effect at the time [they] render[] [their] decision" and that tax liabilities "must be determined in conformity to the regulation[s] then in force." Accordingly, cannabis companies should not assume that the Executive Order, standing alone, changes their Section 280E obligations for the 2025 tax year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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