The Attorney General's final order partially rescheduling marijuana last week has left the community with many lingering questions. My personal favorites revolve around 280E: when is relief from 280E effective, which operators qualify, and what taxpayers can do while waiting for guidance?
Accountants and lawyers in the cannabis industry have long speculated on the retirement of 280E, and most have shared the same prediction: once rescheduling happens, 280E relief will be on a go-forward basis. Perhaps the IRS will so generously allow retroactive relief to the beginning of that taxable year, but few have been optimistic about the IRS officially giving their blessing to amend prior-year tax returns for refunds.
The AG's order granted the industry a glimmer of hope. It directly encouraged the Secretary of the Treasury to "consider providing retrospective relief from Section 280E" for any years in which the operator held a qualifying medical marijuana license.
Logically, this makes sense. It is something many have argued for years: if marijuana is found to meet the criteria of a Schedule III substance, then it always has. 280E never should have applied. But, while this is logically sound, it is impractical, or even impossible, from an administrative perspective.
According to a study published by Whitney Economics, the cannabis industry has paid $15 billion in excess 280E taxes since 2018. Notably, 2018 was the first tax year that 471(c) was able to be utilized by the industry as a tool to capitalize more costs to inventory and therefore mitigate the burden of 280E. So, $15 billion is sure to be a much-reduced figure compared to the years prior. The IRS simply cannot afford to refund all those taxes.
Personally, I was surprised to see this suggested in the order. Unfortunately, but unsurprisingly, the subsequent Treasury and IRS press release failed to mention consideration of relief for prior tax years, but did indicate that relief is expected to extend to the beginning of the 2026 taxable year. That said, the press release did not provide any definitive guidance. Rather, it acknowledged the order and its impact on the applicability of 280E to some of the industry, and noted that guidance would be forthcoming.
Should retrospective relief be granted, it would only be available for tax years in which the statutes of limitation are still open for the taxpayer. Generally, the statutes extend three years from the date you filed your return, or two years from the date you paid your liability, whichever is later. If you have not filed or paid, you may actually be in luck.
For those who are in compliance and timely file tax returns each year, the statutes expired last year for Tax Year 2021, and Tax Year 2022 will be expiring this year. If a taxpayer did not take some action to preserve the statutes, such as filing a protective claim or perhaps taking the leap and filing an amended return, that taxpayer has lost its ability to claim a refund of any overpaid tax.
Per the order, FDA-approved marijuana products and products subject to a state-issued medical marijuana license have been placed in Schedule III of the CSA. 280E only applies to the trafficking of Schedule I and II substances; therefore, the rescheduling removes the burden of 280E from qualifying operators, effective no later than the date of the order, but perhaps retrospectively.
Medical-only states have the most clarity here. They are free from 280E. But what about dual licensees? We are awaiting guidance, but the consensus will most likely be that expenses must be allocated proportionately between medical and adult-use sales. Easy enough for retailers, but how does a producer or manufacturer make that distinction? And where does that leave exclusively adult-use licensees? How can the same product jump from Schedule I to Schedule III based on the individual who purchases the product?
Unfortunately, we do not have many answers yet. The order is expected to face legal challenges, and lawyers and accountants serving the industry will inevitably be scouring the language for ways to maximize the benefit for their clients.
In short: waiting for guidance, but not powerless.
Despite the common misconception, taxpayers are not necessarily at the mercy of the IRS. A taxpayer is entitled to challenge the IRS's interpretation of the law, including positions related to IRC Section 280E. In fact, there are mechanisms built into the tax code and specified tax forms to facilitate this. You can challenge the IRS, but you must follow the prescribed procedures for doing so.
Taxpayers cannot arbitrarily apply their own misguided understanding of how taxes "should be." Rather, Section 1.6662-3(b)(3) requires that the position be supported by recognized authorities, examples of which include the Internal Revenue Code, regulations, court cases, and official IRS guidance, among others.
The real issue is whether the position is supported by one or more relevant tax authorities in a way that is objectively reasonable. A position meeting the reasonable basis standard is stronger than a frivolous or merely colorable argument, but it does not require that the position be likely to prevail.
In practical terms, tax positions exist on a spectrum:
Frivolous > Reasonable Basis (~20%) > Substantial Authority (~40%) > More Likely Than Not (>50%)
If a taxpayer has a "reasonable basis" for taking a position, they can do so and, even if the position is unsuccessful, they are protected from the assessment of penalties.
For the last several years, a legal theory founded on the language of 280E, specifically the phrase "within the meaning," has been circulating as a means of challenging the applicability of 280E to state-legal operators, even in advance of rescheduling. As of last year, that argument has made its way to Tax Court and is currently being litigated.
A "no 280E" position, if based on a well-reasoned interpretation of statutory language currently under litigation (see above: the Internal Revenue Code; court cases) may satisfy the reasonable basis standard. While the reasonable basis standard is considered an objective test, it is applied through evaluative judgment, so its application can be uncertain and contested. Reasonable basis is not unilaterally determined by the IRS, and a position can indeed meet the standard even if the IRS claims it does not.
Further, penalty assessment is nuanced and case-specific. The IRS is required to consider a range of factors when assessing accuracy-related penalties. The risk of assessment is significantly reduced when the taxpayer acts in good faith, maintains accurate accounting records, and provides transparent disclosure with the assistance of a qualified professional. In fact, even if a position is determined not to meet the reasonable basis standard, demonstrating reasonable cause and good faith can still provide some penalty relief.
While there is always the risk of the IRS assessing penalties if it disagrees with the taxpayer's position, the buck does not stop with the IRS. The taxpayer retains the right to contest those penalties through administrative appeals or judicial review. Of course, this is where each taxpayer's risk tolerance must be measured. Only the taxpayer can decide whether the risk is worth the reward and whether they want to fight the fight.
All that to say, the implications of this order are not cut and dry. While I am not holding my breath for the IRS to formalize guidance allowing for retrospective relief, a taxpayer may be justified in taking these "no 280E" positions anyway. And although adult-use cannabis has not been rescheduled yet, this order may serve to further reinforce the position that cannabis does not "fit the meaning" of a Schedule I or II drug and, therefore, 280E should not apply despite its current classification.
Jamie Jorgenstone is a CPA and tax strategist at Calyx CPA LLC, where she advises cannabis and emerging plant-medicine businesses on complex tax issues. With a focus on navigating Section 280E, entity structuring, and defensible tax strategies in highly scrutinized industries, Jamie helps operators balance compliance with thoughtful advocacy.
She is known for bringing both technical rigor and practical insight to challenging tax questions, and frequently speaks on developments affecting cannabis businesses, including evolving IRS authority and strategies for managing federal and state tax conflicts.
