Effective Date Uncertainty

The most critical planning question is determining when Section 280E relief will become effective. The IRS has not yet issued guidance on this issue. Possible effective date scenarios include:

• Final rule publication date: Most conservative interpretation
• Beginning of tax year in which rescheduling occurs: Would provide relief for entire 2026 tax year if finalized in 2026
• Beginning of tax year following rescheduling: Would delay relief until 2027 for calendar-year taxpayers

Recommendation: Tax practitioners should monitor the Federal Register for the administrative hearing schedule and final rule publication. Given current timing, it appears likely that rescheduling will be finalized sometime in 2026, though whether relief applies to the full 2026 tax year or only to 2027 forward remains uncertain.

Retroactive Application

There is no indication that rescheduling will have a retroactive effect for tax purposes. Cannabis businesses should not expect relief from taxes paid under the Section 280E regime in prior years. The statute of limitations for filing refund claims (generally the later of three years from the date the return was filed or two years from the date the tax was paid) continues to run.

Protective claims: Practitioners representing clients who believe they have meritorious constitutional challenges to Section 280E should consider filing protective refund claims to preserve potential remedies, though such claims face significant legal hurdles given longstanding judicial validation of the statute.

Net Operating Loss Carryforwards

Cannabis businesses operating at an economic loss have been unable to recognize those losses for tax purposes due to Section 280E. Whether NOL carryforwards generated in years subject to Section 280E will become deductible in post-rescheduling years presents a complex question.

The argument for deductibility is that the loss was not deductible when incurred solely due to Section 280E’s prohibition. In the carryforward year, assuming Schedule III status, there is no prohibition limiting cannabis business deductions. However, this raises technical questions about whether losses that were never allowed can subsequently be recognized.

IRS guidance required: This issue requires explicit IRS guidance, as the interaction of prior-year 280E disallowances with post-rescheduling tax years presents novel questions.

Depreciation Recapture and Prior Disallowed Amounts

Cannabis businesses have placed substantial assets into service while subject to Section 280E, including real property, equipment, and intangibles. Key open questions include:

• Will businesses be permitted to claim catch-up depreciation for prior years when such deductions were disallowed under Section 280E?
• Will bonus depreciation be available for assets placed in service prior to rescheduling?
• How will Section 197 intangibles with unamortized basis be treated—catch-up amortization or prospective amortization only?
• What treatment will apply to capitalized Section 174 research costs?

The AICPA submitted a letter to Treasury and the IRS in October 2024 requesting guidance on these issues prior to rescheduling implementation.

Entity Structure Reconsideration

Many cannabis businesses elected C corporation status specifically to manage the punitive effects of Section 280E. Under Section 280E, pass-through entities faced particular challenges as higher taxable income at the gross profit level versus net profit level flowed through to the owners and the disallowed deductions reduced shareholder or partner basis causing tax implications upon the sale of the business.   

Post-rescheduling, the traditional corporate tax rate of 21% plus individual tax on dividends may no longer be optimal for many cannabis businesses. Practitioners should evaluate:

• Whether conversion to pass-through status (S corporation or partnership) would result in lower overall tax burden
• Potential application of Section 199A qualified business income deduction for pass-through entities
• Potential tax savings from a PTET election for a pass-through entity
• Built-in gains tax implications for C to S corporation conversions
• State tax conformity issues, as some states have decoupled from Section 280E

State Tax Considerations

More than a dozen states have already decoupled from Section 280E for state tax purposes, allowing cannabis businesses operating legally under state law to deduct ordinary business expenses on state returns. These states include California, Connecticut, Delaware, New Jersey, New York, Virginia, and Washington, D.C.

Post-federal rescheduling, practitioners must monitor whether states that currently disallow full deductions will maintain that treatment or potentially reconsider their positions. States may need to update their conformity statutes or regulations related to Section 280E.

Estimated Tax Payment Adjustments

If rescheduling occurs during 2026, cannabis businesses will need to recalculate estimated tax payments for subsequent quarters. The elimination of Section 280E will dramatically reduce taxable income, potentially creating substantial overpayment scenarios for businesses that made estimated payments based on prior 280E calculations. Practitioners should prepare to file amended estimates and potentially seek quick refunds of overpayments.