Cannabis Rescheduling and Section 280E: Tax Relief, IRS Audits and Compliance Risks

Marijuana rescheduling has created new opportunities for tax relief in the U.S. cannabis industry. However, changes to federal drug scheduling do not automatically eliminate every tax liability or resolve disputes involving previous tax returns.

For cannabis operators, the transition raises important questions about Internal Revenue Code Section 280E, cost of goods sold (COGS), accounting methods, inventory costs and potential Internal Revenue Service (IRS) audits.

Businesses that act too quickly without reviewing their existing tax positions may create additional compliance risks, even as the regulatory environment evolves.

What Does Marijuana Rescheduling Mean for Section 280E?

Section 280E of the Internal Revenue Code restricts deductions and credits for businesses trafficking in Schedule I or Schedule II controlled substances in violation of applicable federal law. Historically, this provision has imposed a substantial tax burden on cannabis businesses, even in states where marijuana sales are permitted under state law.

Under the traditional 280E framework, qualifying cost of goods sold can generally be used to calculate gross income, but ordinary operating expenses such as administrative costs and certain payroll expenses cannot simply be deducted in the same way as they can by many other businesses.

The federal rescheduling process has therefore attracted considerable attention from cannabis operators, accountants, investors and tax professionals.

In April 2026, the U.S. Department of Justice announced an order placing FDA-approved marijuana products and marijuana products covered by qualifying state-issued medical marijuana licenses in Schedule III. The action also initiated a process to consider broader rescheduling.

Importantly, this medical-marijuana action should not be confused with a blanket reclassification of all adult-use cannabis products. Businesses need to evaluate which products and activities qualify under the applicable rules and how the relevant effective dates affect their tax positions.

Five Cannabis Tax Risks Businesses Should Review

1. Shared Costs Between Medical and Adult-Use Operations

Some cannabis companies operate both medical and adult-use businesses within the same organization.

When different activities are subject to different tax treatment, shared expenses-including payroll, utilities, rent and administrative overhead-may require careful allocation.

Businesses should maintain consistent, documented allocation methods supported by operational records. Simply assigning expenses to the most favorable tax category without a defensible basis may increase audit exposure.

2. Reclassifying Historical COGS as Current-Year Deductions

The treatment of cost of goods sold is not interchangeable with the deduction of ordinary business expenses.

Cannabis operators should avoid automatically moving expenses previously included in inventory costs or COGS into current-year deductions merely because the regulatory environment has changed.

Historical tax returns, inventory schedules and accounting records should be reviewed before making adjustments. Any change in treatment should have a documented legal and accounting basis.

3. Changes in Accounting Methods

Changes involving the timing of income recognition or deductions may raise accounting-method issues under federal tax rules.

Depending on the circumstances, a business may need to consider whether IRS Form 3115, Application for Change in Accounting Method, is required.

Because these changes can affect multiple tax years, cannabis businesses should consult qualified tax professionals before modifying established accounting practices or submitting revised filings.

4. Inventory Capitalization and COGS Calculations

The end of a particular tax restriction does not necessarily mean every previously nondeductible expense becomes immediately deductible.

Inventory accounting and uniform capitalization rules may require certain production-related, purchasing, handling, storage or allocable overhead costs to be included in inventory costs, depending on the applicable rules and circumstances.

As businesses transition to new tax treatments, they should review how costs are classified, when they are recognized and how inventory values are calculated.

5. Historical Tax Returns and Potential Refund Claims

Some cannabis operators may have previously taken positions on Section 280E that remain subject to dispute.

Businesses considering amended returns or protective refund claims should examine the relevant tax years, filing deadlines, supporting documentation and status of any ongoing litigation.

A potential refund opportunity is not the same as an established entitlement to a refund. Claims should be evaluated individually with qualified tax counsel.

How Cannabis Businesses Can Prepare for IRS Audits

A proactive compliance review can help operators identify inconsistencies before they become larger disputes.

Consider the following steps:

Review prior-year returns. Compare tax filings, COGS calculations, inventory schedules and expense classifications across relevant years.

Document allocation methods. Maintain supporting records for shared payroll, rent, utilities and administrative expenses, especially where medical and adult-use operations overlap.

Evaluate accounting-method changes. Determine whether changes in the timing or treatment of income and expenses require additional IRS filings or approvals.

Reconcile inventory records. Confirm that purchasing costs, handling expenses, production costs and overhead allocations are treated consistently with applicable inventory rules.

Assess refund opportunities. Work with tax counsel to evaluate whether protective refund claims or other procedures are appropriate for specific tax years.

Coordinate ongoing disputes. Businesses already facing an audit, administrative appeal or tax litigation should coordinate any new filings with their existing legal strategy.

What Cannabis Operators Should Watch Next

The long-term impact of marijuana rescheduling will depend on the scope of the applicable federal orders, their effective dates, IRS guidance and the resolution of outstanding legal disputes.

Cannabis operators should avoid assuming that every business activity qualifies for the same tax treatment or that a change in scheduling automatically resolves historical liabilities.

For CFOs, controllers, accountants and business owners, the priority is to establish a defensible tax position supported by accurate records and professional advice.

Final Takeaway

Marijuana rescheduling may create meaningful tax opportunities for qualifying cannabis businesses, but it also introduces new accounting and compliance questions.

The most effective response is not simply to claim additional deductions. It is to review historical filings, document current accounting practices, evaluate inventory treatment and obtain professional advice before making material tax adjustments.

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or accounting advice. Federal cannabis regulations and tax interpretations may change. Consult qualified professionals regarding your specific circumstances.

Source and Further Reading: This article discusses issues raised in Gray Proctor's MJBizDaily guest column, "Beyond 280E relief: The hidden tax audit risks of marijuana rescheduling," published October 16, 2026. Readers should consult the original article and relevant official government guidance for further details.