Table of Contents
- What is IRC 280E?
- The Legal Challenges to IRC 280E
- Emerging Advisor Positions on IRC 280E
- What Regulators and Policymakers Are Saying
- Our Compliance Recommendation
The Current Landscape
We’re observing a concerning trend in the cannabis industry: a growing number of operators have begun taking the position that IRC 280E no longer applies to their operations. Some are making this decision based on advice from legal and tax professionals. This strategic shift started before President Trump’s December 18, 2025 Executive Order on marijuana rescheduling under the federal Controlled Substances Act (CSA).
Our position at Trust Integritas is unequivocal: This represents a misinterpretation of current law and exposes businesses to significant compliance risk.
What is IRC 280E?
IRC 280E is the federal tax provision that prohibits businesses trafficking in Schedule I or Schedule II controlled substances from deducting ordinary and necessary business expenses on federal tax returns. For state-licensed cannabis operators, this means paying federal income tax on gross income (revenue minus cost of goods sold) rather than net income.
The financial impact varies by business model, but IRC 280E creates substantial tax burdens across the industry. While we’ve consistently advocated for reform, our compliance obligation is to acknowledge current legal reality.
The Legal Challenges to IRC 280E
The Track Record
Cannabis businesses have repeatedly challenged IRC 280E over the past decade on constitutional and “as applied” grounds. Trust Integritas has supported these efforts, including litigation involving industry stakeholders. However, the results speak clearly:
- With the narrow exception of Champ v. Commissioner, no cannabis taxpayer has prevailed in an IRC 280E case
- Courts have uniformly upheld IRC 280E’s validity when applied to marijuana businesses
- Every constitutional challenge has been rejected
- Limited victories have come only through COGS adjustments and specific refund requests
The Case to Watch: New Mexico Top Organics
New Mexico Top Organics, Inc. d/b/a Ultra Health v. Commissioner (“NMTO”), filed in October, presents the latest challenge. The central argument: marijuana is no longer “within the meaning” of Schedule I, despite its formal listing.
The case relies on:
- HHS’s 2023 determination recommending Schedule III placement
- Congressional spending bill provisions
- Proposed rescheduling initiated under the Biden administration
Critical limitations of this case:
- The plaintiff operates as a medical marijuana business, not adult-use
- No arguments claim IRC 280E is inapplicable to general adult-use sales (the majority of the market)
- Any Tax Court decision could face appellate review in the Tenth Circuit
- Relief, if granted, would not immediately extend to non-litigants
From a compliance perspective, pending litigation does not constitute legal change.
Emerging Advisor Positions on IRC 280E
The Responsible Majority
Most attorneys and CPAs continue providing sound counsel: marijuana remains Schedule I, and IRC 280E remains applicable. This represents the majority professional view and aligns with regulatory guidance.
Aggressive Outlier Positions
We’ve observed some professionals advancing positions that marijuana businesses are no longer subject to IRC 280E, or even claiming marijuana has been rescheduled (it has not). These positions often mirror NMTO’s arguments, sometimes extending them to claim applicability to adult-use sales.
Trust Integritas’s assessment: These positions, however creatively argued, constitute aggressive tax positions that expose clients to material compliance risk.
What Regulators and Policymakers Are Saying
IRS Position: Clear and Consistent
June 2024: Following HHS’s Schedule III recommendation, the IRS issued a memo titled “Marijuana remains a Schedule I controlled substance; IRC 280E still applies.” The Service specified this would remain true “until a final federal rule is published.”
Status: No final rule was published under the Biden administration’s rescheduling process. No final rule has been published following President Trump’s executive order.
December 2024: The IRS reinforced its position, noting 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” carries specific meaning in tax compliance (26 CFR 1.6662-3(b)(3)). Failing to meet this standard triggers penalties. The IRS communication is deliberate and direct.
Congressional Activity
Congress has not enacted legislation to:
- Nullify IRC 280E’s effects
- De-schedule or reschedule marijuana
All bills proposing such changes have failed.
February 6, 2025: The Congressional Research Service published “The Application of Internal Revenue Code Section 280E: Selected Legal Issues.” Despite IRS guidance, the report acknowledges “little tax guidance concerning the application of Section 280E.” It discusses several proposals that, if enacted, would eliminate IRC 280E’s prohibition on deductions and credits for marijuana businesses.
Key word: IF. Without enactment, IRC 280E remains operative law.
Our Compliance Recommendation
The Risk We’re Observing
The desire to claim deductions available to other U.S. businesses is understandable. Combined with aggressive professional advice in an atmosphere of potential rescheduling, we’re seeing:
- More cannabis businesses filing returns that disregard IRC 280E
- Amended returns seeking refunds for taxes paid under IRC 280E, contrary to IRS warnings
- Some refunds being processed (with uncertain long-term outcomes)
Our guidance for any processed refunds: Set those funds aside through the full audit window.
Our Position on Current Compliance
At Trust Integritas, our advice is grounded in legal reality, not optimistic interpretation:
IRC 280E currently applies to marijuana businesses.
This position is based on:
✓ Marijuana’s continued Schedule I status
✓ Absence of a final rescheduling rule
✓ Clear IRS guidance
✓ Consistent judicial precedent
✓ Congressional inaction on reform
Looking Forward
We remain hopeful that rules will change for tax year 2026. We’re monitoring the Department of Justice’s next steps on President Trump’s rescheduling order, hoping for a final rule or better.
But hope is not a compliance strategy.
Until substantive legal change occurs, businesses that disregard IRC 280E are accepting:
- Audit risk
- Penalty exposure
- Potential accuracy-related penalties
- Interest on underpaid taxes
- Professional credibility concerns
Trust Integritas’s Commitment
We understand the frustration IRC 280E creates. We support reform efforts. We advocate for fair tax treatment of state-legal cannabis businesses.
We also understand that integrity means providing honest counsel, even when the law is unfavorable. Our role is to help you navigate compliance while positioning your business for success when reform arrives.
For guidance on IRC 280E compliance, COGS optimization, and risk management strategies, contact Trust Integritas www.Trust-Integritas.com. We help cannabis businesses maintain integrity while managing the complex regulatory landscape.