Protective Claims: Preserving Your Ability to Deduct Prior Year 280E Expenses

For cannabis businesses grappling with the heavy tax burden of Section 280E, the IRS recently made its position crystal clear: don’t try to sidestep it with disclosure forms or amended returns.

But what if the courts eventually rule that 280E doesn’t apply to state-legal operators? Without a plan in place, you could miss out on reclaiming years’ worth of deductions.

The key to keeping that door open? A little-known tax strategy called a protective claim. 

IRS Issues Warning on 280E Compliance: No Loopholes, No Exceptions

What exactly did the IRS say? This past December, the IRS issued a notice with guidance for state legal cannabis companies. A paraphrase: Do not attempt to claim all your expenses as deductions with a Form 8275 disclosure note. Do not amend prior year returns claiming these expenses with a Form 8275 disclosure note. Do not disregard 280E. Do not follow in Trulieve’s footsteps (challenging 280E through aggressive filings). 

Keeping the Door Open for Tax Relief

For operators who have heeded this advice, and who lack a sufficient legal war chest to fight 280E in federal court, is there anything you can do?

Yes, there is a legal strategy that can help: filing a protective claim. This preserves your ability to amend prior-year returns in the event that a court ruling determines 280E does not apply and that decision is applied retroactively.

Several legal challenges to 280E are currently in progress.

• For example, a case filed December 16, 2025, New Mexico Top Organics Inc v Commissioner, challenges whether Marijuana is “within the meaning of” the Controlled Substances Act Schedule I or II.
• Another suit, Canna Provisions v Garland, is also advancing through the courts with potential implications for cannabis taxation.

How might a smaller operator also benefit from these cases? If one of these cases results in a favorable decision, cannabis businesses may be able to amend prior-year returns to deduct expenses previously denied under 280E. 

However, the right to amend tax returns is typically limited to three years from the filing date.

Why Protective Claims Matter

Without a protective claim, businesses could lose the ability to amend older returns. 

For example:  

• If a court ruling in December 2025 determines that 280E does not apply, businesses could amend their 2022, 2023, and 2024 returns, as they would still be within the three-year amendment window.
• 2021 returns, however, would be locked out if they were filed before December 2022.

A protective claim extends this window, allowing businesses to amend returns beyond the standard three-year limit when there are unresolved tax matters pending, such as legal challenges to the tax treatment of cannabis businesses.

Is Filing a Protective Claim Worth It?

Filing a protective claim requires legal and accounting expertise, so businesses must weigh the cost against the potential benefits. If the courts rule in favor of cannabis operators, the tax savings could far exceed the upfront expenses.

The claim must be carefully drafted to meet IRS requirements, so it’s essential to work with an attorney and accountant experienced in cannabis tax law.

A protective claim must be narrowly written and apply only to specific situations.

It must include:

• The relevant court cases currently pending.
• How your situation is similar to the plaintiffs in those cases.
• A calculation of the tax you could recover if the ruling is favorable.

By meeting these requirements, a protective claim preserves your right to amend past tax returns even after the typical three-year window has closed.

Review Before It Is Too Late

For Missouri licensees, 2021 was the first full year of operations. Now is the time to review your filing date and how much you were unable to deduct on your 2021 return(s) due to 280E. Then, reach out to your accountant to determine whether filing a protective claim makes sense for your business.

At Smith Patrick CPA, we’ve worked closely with cannabis operators across Missouri since the state’s medical market launched. Our team understands the complex and evolving tax challenges cannabis businesses face—from navigating 280E to identifying opportunities like protective claims. If you’re looking for strategic guidance tailored to your cannabis operation, we’re here to help.