Tax Alert: Medical Cannabis Moves to Schedule III While Adult-Use Waits

Here’s What It Means for 280E and Your Tax Bill

On April 23, the Department of Justice reclassified state-licensed medical marijuana and FDA-approved cannabis products from Schedule I to Schedule III under the Controlled Substances Act. For medical cannabis operators, this is a significant federal tax development. For adult-use operators and anyone operating in a mixed-use market, the picture is more complicated.

The End of 280E for Medical Operators

Section 280E of the Internal Revenue Code has been a financial burden for cannabis operators since Missouri’s legal market opened. Under the Controlled Substances Act, state-licensed cannabis businesses have been classified as traffickers of a Schedule I controlled substance and therefore subject to IRS Code Sec 280E. That classification means operators can only deduct cost of goods sold from their taxable income. Other ordinary and necessary business expenses cannot be deducted. State legal medical cannabis is now a Schedule III drug, and 280E no longer applies.

Schedule III substances are not subject to 280E. Moving medical cannabis from Schedule I to Schedule III ends the 280E tax burden for medical cannabis sales. However, the April 23 order does not eliminate 280E for adult-use cannabis. That remains an open question, with a formal public hearing scheduled for late June.

Where Things Stand: Four Planning Considerations

There is significant uncertainty about how the separation in tax treatment between medical and adult-use will play out, and about what adult-use rescheduling will ultimately look like. Here is where things stand on specific planning questions.

Hold on 2025 Tax Returns

For returns currently subject to 280E but not yet filed, there is no benefit to filing before the Adut Use question is addressed by the summer rescheduling. Too much remains unsettled. The IRS has indicated additional guidance is forthcoming. If you have not already filed, wait for this guidance.

Review Management Agreements and Ownership History

One unexpected element of the April 23 order deserves attention: language requesting that the Secretary of the Treasury evaluate the retrospective application of 280E to state-licensed cannabis entities. Retrospective relief is not guaranteed. But if your license has been held by the same entity and ownership group throughout its existence, estimating a potential benefit is relatively straightforward. If ownership has changed or a management agreement has been in place at any point, review those agreements and consult legal counsel now to best understand how retroactive removal of 280E would impact you.

File a Protective Claim

If you filed or amended a 2022 income tax return between May and October of 2023, now is the time to consider a protective claim. Under the Internal Revenue Code, income tax returns generally remain open for amendment for three years from the date of filing or two years from the date taxes were paid, whichever is later. A protective claim preserves your ability to amend beyond that three-year deadline. The April 23 order provides solid legal footing for filing such a claim. Protective claims should be filed weeks, rather than months, before your deadline, as the landscape is shifting rapidly.

For a full explanation of how protective claims work and why the window matters, read: Protective Claims: Preserving Your Ability to Deduct Prior Year 280E Expenses

Watch the Hemp Deadline

Farm, manufacturing, and retail businesses operating in the intoxicating hemp or THCA flower with total THC levels exceeding 0.4 mg per package will likely be considered federally illegal and subject to 280E after November 12, 2026. If your operation touches this part of the market, consider tracking that deadline.

What Comes Next

The formal hearing on adult-use rescheduling begins June 29 and is scheduled to conclude by July 15. That outcome will determine whether the rest of the industry follows medical cannabis out of Schedule I. In the meantime, the planning decisions outlined above are worth acting on now, before that picture becomes clearer.

Smith Patrick CPAs works with Missouri cannabis operators on 280E strategy, protective claims, estimated tax planning, and the financial questions that come with a rapidly changing regulatory environment. If you have questions about how the April 23 order affects your specific situation, get in touch with me directly.