A quiet rebellion is underway inside the cannabis industry's accounting departments. Over the past year or two, a growing number of marijuana businesses have stopped treating IRC 280E - the federal tax provision that strips them of ordinary business deductions - as binding law. Some are doing so on the advice of attorneys and CPAs. The problem, according to tax practitioners who work the space closely, is that the law hasn't changed, and the IRS has said so twice in writing.
What IRC 280E Actually Does - and Why It Hits So Hard
IRC 280E is a provision in the Internal Revenue Code that bars businesses engaged in the "trafficking" of Schedule I or Schedule II controlled substances from deducting ordinary and necessary business expenses on their federal returns. For marijuana businesses, which remain federally classified as Schedule I traffickers regardless of state law, this means paying income tax on gross income - revenue minus cost of goods sold - rather than on net profit. Rent, payroll, utilities, marketing: none of it deductible. For a business operating on thin margins, the difference between taxing gross income and net income is not semantic. It can be existential.
Courts have consistently upheld IRC 280E's validity over the past decade. Every constitutional challenge has failed. The one meaningful taxpayer win on record, Champ v. Commissioner, stands largely as an exception that tested the edges of what counts as a separate trade or business. The more relevant precedent is the pile of cases that went the other way.
The Arguments Now Circulating - and Why They Don't Hold
The intellectual foundation for the new wave of 280E skepticism traces largely to a pending tax court case: New Mexico Top Organics, Inc. d/b/a Ultra Health v. Commissioner, filed last October. The plaintiff, a medical marijuana operator, argues that marijuana is no longer "within the meaning" of Schedule I of the Controlled Substances Act - despite being listed there - based on a 2023 HHS recommendation to move cannabis to Schedule III, subsequent Congressional spending provisions, and the Biden administration's proposed rescheduling. The case has not been decided. Even if it were decided in the plaintiff's favor, that ruling would be subject to Tenth Circuit appeal and would not automatically extend to non-litigants, let alone to adult-use sales, which constitute the majority of the national market.
That hasn't stopped certain advisors from taking the argument further. Some CPAs have argued that the NMTO reasoning applies equally to adult-use dispensaries - a position that leaps well past what even the litigating plaintiff is claiming. One law firm circulated social media content suggesting marijuana businesses might simply opt out of 280E compliance; that post was deleted after pushback. The kindest characterization of this advice, to borrow a useful euphemism, is that it's an interesting position.
The IRS Has Not Been Subtle About This
Here's the thing: the IRS has made its view explicit, and not just once. In June 2024, following the HHS recommendation on rescheduling, the Service published a memo stating plainly that marijuana remains a Schedule I controlled substance and that IRC 280E continues to apply "until a final federal rule is published." No final rule was published under Biden. None has been published following President Trump's December 2025 executive order directing rescheduling under the CSA - an order that, whatever its eventual effect, does not itself constitute a final rule.
Six months after that first memo, the IRS published a follow-up specifically addressing the wave of businesses filing returns that disregard 280E. The agency characterized these rationales as failing to constitute "reasonable basis" - a term of art in federal tax law that carries real weight. Under 26 CFR 1.6662-3(b)(3), failure to meet the reasonable basis standard exposes taxpayers to a range of accuracy-related penalties. The IRS does not invoke that standard casually.
The Congressional Research Service, in a February 2025 report titled "The Application of Internal Revenue Code Section 280E: Selected Legal Issues," reinforced the point indirectly. The report outlines pending legislative proposals that would nullify 280E's effects - which is another way of saying that without those proposals becoming law, the provision stands. Congress has not passed any of them.
The Risk Calculation for Businesses Considering This Path
The appeal of ignoring 280E is obvious. No cannabis operator wants to pay federal income tax on revenue figures that bear no resemblance to actual profit. And with rescheduling rhetoric in the air - executive orders, agency recommendations, draft rules - it's easy to convince yourself the legal ground has already shifted. It hasn't. Not formally. Not in any way that survives an IRS audit.
For businesses that have already filed amended returns seeking refunds for taxes paid under the 280E regime, the practical advice from cautious practitioners is pointed: if the refund arrives, hold onto it. Don't spend it. Audit windows exist for a reason, and the IRS has demonstrated it is watching this behavior specifically.
Rescheduling may yet happen. A final rule, properly published through the administrative process, could change the calculation for tax year 2026 and beyond. Until that rule exists - not an executive order, not an agency recommendation, but a published final rule - marijuana businesses that ignore IRC 280E are betting that their advisors know the law better than the IRS does. The courts, consistently and without exception, have said otherwise.
