This is the second of 13 posts describing the impacts of marijuana’s rescheduling. An homage to Phish’s historic run at Madison Square Garden in the Summer of 2017, Budding Trends Baker’s Dozen will address how rescheduling affects various areas of the law and our daily lives. Enjoy the run.

These days nobody agrees on anything. Until now. Since the announcement rescheduling state-licensed medical marijuana and FDA-approved medications containing marijuana from Schedule I to Schedule III, there has been near universal commentary that the most definitive — and perhaps most significant — implication of the change was removing the yoke of 280E from the backs of medical marijuana operators. 

I can almost hear you exclaiming “Yay, a tax blog!” But stay with me. Actually, I think this is when I am supposed to tell you I’m not a tax lawyer, although I know a bunch of good ones.

Background: What § 280E Actually Does

It’s only one sentence. Seventy-seven words that have been one of the most burdensome challenges to marijuana operators trying to turn a profit:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Section 280E of the Internal Revenue Code disallows all ordinary business deductions and credits for any trade or business that consists of trafficking in controlled substances listed in Schedule I or II. It does not mention Schedule III. The practical consequence has been devastating for cannabis operators — effective tax rates approaching or exceeding 70-75% in some cases, because operators can only deduct the cost of goods sold (COGS), not payroll, rent, marketing, or any other operating expense. The rescheduling to Schedule III is the key that turns off this penalty, because the statutory trigger by its own terms only reaches Schedules I and II.

This is a staggering win for state-licensed medical cannabis operators. Full stop. So how will the rollback of 280E’s chokehold take effect in practice?

This Year (Tax Year 2026) — The Transition Rule

The same day of the rescheduling announcement, the Department of the Treasury issued a press release describing the “Process for Tax Guidance Following DOJ Final Order on Medical Marijuana Rescheduling”:

Treasury and the IRS expect DOJ’s action to have significant positive tax consequences for businesses in the medical marijuana industry, and Treasury and the IRS plan to issue guidance to address the principal federal tax issues stemming from the Final Order.

Guidance is expected to include a transition rule providing that, for purposes of Section 280E, rescheduling generally will be considered to first apply for a business’s full taxable year that includes the effective date of the final order, for the business’s activities that do not involve Schedule I or II controlled substances as a result of the final order.

The operative language is “full taxable year.” Since the final order’s effective date is April 22, 2026, and most businesses operate on a calendar year, the transition rule means that for calendar-year taxpayers, 280E relief will be treated as applying as of January 1, 2026 — not just from April 22 forward. This is a significant administrative gift to operators: They do not need to do mid-year expense allocation between a “280E period” (January 1–April 21) and a “post-280E period” (April 22–December 31). The entire 2026 tax year is treated as Schedule III for qualifying activities.

Practically, this means a qualifying state-licensed medical marijuana operator filing its 2026 return next year can deduct wages, rent, utilities, marketing, depreciation and amortization expenses, and all other ordinary business expenses for the entire year — potentially cutting its effective federal tax rate from the 70%+ range to something closer to the 21% corporate rate (or ordinary income rates for pass-throughs).

The critical limitation: For state-legal adult-use (recreational) marijuana businesses, the deduction bar under 280E remains fully in effect. This bifurcation creates an immediate and serious compliance challenge for multi-state operators (MSOs) and dual-license businesses.

Future Years — The Mixed-Operation Problem

For businesses operating exclusively under state medical marijuana licenses, the path forward is relatively clear: 280E no longer applies, full deductions are available, and the economics of the business change dramatically overnight.

The harder problem is for operators with both medical and adult-use revenue — which describes a large portion of the industry’s major players. Guidance is expected to clarify the ways in which, for businesses with multiple activities, Section 280E applies only to those activities related to trafficking in Schedule I or II controlled substances by apportioning expenses.

The apportionment methodology that forthcoming IRS guidance will establish is critically important and currently unresolved. The core question is: How do you allocate shared costs — a single building, the same employees, the same back-office — between a Schedule III medical activity (fully deductible) and a Schedule I adult-use activity (280E still applies)? The IRS has discretion to design this methodology, and operators have a strong interest in a revenue-based or gross-profit-based allocation rather than one that assigns the lion’s share of shared costs to the non-deductible bucket. Until the Treasury issues guidance, operators should review their cost allocations, ensuring any shared cost has a methodology that holds up under IRS scrutiny if medical and adult-use end up taxed differently.

The broader rescheduling hearing beginning June 29 is also relevant here. If adult-use marijuana is moved to Schedule III through that process — potentially by late 2026 or early 2027, though litigation could delay it — the entire 280E problem for the industry evaporates. Dual-license operators are essentially in a holding pattern on their adult-use tax exposure until that hearing concludes.

Retroactivity — The Most Contested and Uncertain Dimension

This is where the DOJ final order and the Treasury announcement diverge in a way that leaves enormous amounts of money unresolved.

The final order itself nudged Treasury toward retroactive relief. The order “encourages” the Treasury secretary “to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license.” That is a formal recommendation from DOJ to Treasury — but it is explicitly precatory, not mandatory, and the final order itself disclaimed any determination of tax liability.

Treasury’s response, as reflected in its announcement, is notably more cautious. The Treasury has yet to confirm whether it will adopt the recommendation from the DOJ or instead proceed with changes just applying to the current taxable year, creating uncertainty over the full extent of potential benefits. Read together with the transition rule — which starts the clock at the beginning of the taxable year containing the effective date, not at any earlier point — the announcement signals that retroactive relief for prior tax years is not guaranteed and may not be coming at all in the initial guidance.

The stakes here are enormous. Major U.S. multistate operators are collectively carrying more than $1.6 billion in disputed 280E tax positions, with Trulieve alone carrying approximately $445 million in potential tax exposure tied to disputed 280E positions, including $412.6 million explicitly related to its 280E challenge. These companies have been banking on some form of retroactive relief, but as of now Treasury has made no commitment.

There are two distinct categories of retroactive exposure worth separating:

Category 1 — Open tax years (roughly 2022–2025). The IRS generally has a three-year statute of limitations for assessments, but operators who filed returns paying 280E-inflated taxes for open years could potentially file amended returns to claim refunds — if Treasury issues guidance supporting retroactivity. Without that guidance, operators who file amended returns claiming prior-year deductions do so at their own risk and invite IRS challenge. Do not file amended returns yet — the interaction between the DOJ order, IRS guidance, and 280E’s statutory text isn’t settled. Moving too fast creates exposure, not savings.

Category 2 — Already-assessed or litigated years. For operators with IRS disputes in Tax Court or at the audit stage, the picture is even more complicated. As recently as March 6, the IRS argued in Tax Court in the case of New Mexico Top Organics v. Commissioner that past 280E taxes are owed in full regardless of rescheduling. Treasury guidance could moot those positions, but until it does, the IRS’s litigation posture remains adverse to retroactive relief.

The Practical Action Items, Organized by Operator Type

For pure medical operators: The 2026 full-year 280E exemption is essentially confirmed by the transition rule. File 2026 returns claiming full deductions. Consider filing protective claims for open prior years now to preserve optionality pending Treasury guidance on retroactivity — a protective claim tolls the refund statute without forcing a premature fight. The statute of limitations for filing a claim for refund is generally the later of two years after the date of payment of the tax or three years from the date the tax return was filed. If a refund claim is not filed within that statute, there will be no refund available. Consult tax counsel immediately.

For dual-license (medical + adult-use) operators: Begin the expense segmentation and allocation work now. Pull trailing revenue by license type. Fix any accounting system that cannot cleanly separate medical from adult-use activity — this will be the IRS’s first question. Do not claim adult-use deductions under 280E; they remain barred. Monitor the upcoming hearing on adult-use rescheduling closely, as it will determine whether the adult-use burden goes away entirely.

For pure adult-use operators: Nothing changes today. 280E still applies in full. The hearing regarding adult-use rescheduling is the only near-term path to relief. Budget accordingly, and do not assume the hearing outcome will be favorable on a fast timeline.

For all operators with prior-year disputed positions: Do not withdraw Tax Court petitions or settle disputes on unfavorable terms based on the assumption that retroactive relief is coming. Wait for Treasury guidance. The retroactivity question is genuinely open, and settling now would forfeit leverage that may prove unnecessary.

Conclusion

The Treasury announcement confirms 2026 relief (on a full-year basis for qualifying operators) but leaves retroactivity deliberately open — creating a tension between DOJ’s aspirational push for retrospective relief and Treasury’s more cautious posture of “guidance to come.” The financial stakes of the retroactivity question dwarf the forward-looking benefit for operators carrying large prior-year disputed tax positions. Until Treasury issues its guidance, the prudent approach is protective claims for open years, aggressive expense segregation for mixed operations, and no premature amended return filings.