Recent announcements from the Trump administration directing federal agencies to move cannabis from Schedule I to Schedule III have raised important questions across the industry. As a result, many operators are reassessing their tax and compliance strategies.
The most common question is straightforward: Does this eliminate 280E?
The answer is yes. However, this only happens once rescheduling becomes effective. Because of that, timing matters more than many operators expect.
This article explains how cannabis rescheduling works, how long the process may take, when Section 280E actually ends, what happens to prior tax years and existing NOLs, and why the transition year requires early planning.
What Does It Mean to Reschedule Cannabis to Schedule III?
Under the Controlled Substances Act, Schedule III substances have accepted medical use and a lower potential for abuse than Schedule I drugs. In contrast, federal law treats Schedule I substances as having no accepted medical use.
From a tax perspective, this distinction matters. Section 280E applies only to Schedule I and Schedule II substances. Therefore, once federal agencies treat cannabis as Schedule III, the tax framework changes.
Specifically:
- Businesses can deduct ordinary and necessary operating expenses
- Cannabis operators no longer fall under Section 280E
- Federal tax treatment begins to resemble that of traditional industries
That said, this change does not happen automatically. Importantly, it also does not apply retroactively.
How the Cannabis Rescheduling Process Works
Federal agencies cannot reschedule cannabis by executive order alone. Instead, federal administrative law requires a formal, multi-step process.
The process follows this sequence:
- First, HHS completes a medical and scientific review
- Next, HHS submits a recommendation to the DEA
- Then, the DEA publishes a proposed rule
- After that, the public submits comments during the notice period
- Subsequently, the DEA issues a final rule
- Finally, the Federal Register publishes the final rule
- At that point, rescheduling takes effect on the stated date
Until the final rule takes effect, cannabis remains Schedule I for tax purposes. Consequently, Section 280E continues to apply.
How Long Will Cannabis Rescheduling Take?
Based on prior regulatory actions, two realistic timelines apply.
In a best-case scenario, the process may take four to six months. However, legal challenges or extended review can stretch the process to eighteen or even twenty-four months.
Several factors influence timing. These include administrative workload, political pressure, legal risk, and the volume of public comments. For that reason, operators should not expect immediate tax relief.
When Does Section 280E Actually Go Away?
Section 280E disappears only when rescheduling becomes effective. Announcements or proposed rules do not change tax treatment.
This distinction matters.
If rescheduling becomes effective in the middle of a tax year, the business faces a split year. For example:
- From January 1 through June 30, 280E still applies
- From July 1 through December 31, 280E no longer applies
As a result, operators must manage both planning opportunities and execution risk. In practice, timing decisions carry far more weight in a transition year.
Can Cannabis Businesses Amend Prior Tax Returns?
No.
Tax law applies based on the rules in effect during the year filed. Therefore, when cannabis fell under Schedule I, Section 280E applied even if federal law changes later.
Because of this, operators cannot amend prior returns to deduct expenses previously disallowed. The IRS does not provide retroactive relief in these cases.
Accordingly, operators should approach any advice suggesting otherwise with caution.
What Happens to Existing NOLs Created Under 471(c)?
Many cannabis businesses generated net operating losses through cost capitalization strategies, including Section 471(c). Businesses calculated these losses correctly under the law in effect at the time.
As a result:
- Existing NOLs remain valid tax attributes
- Standard NOL carryforward rules continue to apply
However, rescheduling does not allow operators to recalculate prior taxable income. At the same time, closed tax years remain governed by prior law.
Looking ahead, post-280E years may look very different from a tax perspective. Nevertheless, prior filings do not change.
Why the Transition Year Requires Special Attention
The year rescheduling becomes effective may present the most complex tax environment cannabis operators have faced. Overlapping rules, partial-year treatment, and increased scrutiny drive that complexity.
Operators should focus on:
- Expense timing
- Compensation planning
- Accounting method consistency
- Cash flow forecasting
- Internal controls and documentation
- Coordination between tax, finance, and operations
For this reason, the transition year extends beyond tax filing. Instead, it requires operational and financial planning.
Waiting until year-end increases both compliance risk and missed opportunity.
What Rescheduling Does Not Change
It is equally important to understand what remains unchanged.
Rescheduling does not legalize cannabis federally. Likewise, interstate commerce remains restricted. In addition, state licensing and compliance rules continue to govern operations.
Although tax treatment improves, disciplined compliance remains essential.
How Cannabis Operators Can Prepare Now
Even without a final effective date, operators can act now.
For example:
- Model partial-year tax scenarios
- Review expense timing and compensation structures
- Evaluate accounting methods and internal controls
- Align finance and operations teams
- Avoid aggressive or speculative filing positions
Ultimately, preparation delivers more value than prediction.
Final Thoughts
Cannabis rescheduling to Schedule III represents a forward-looking tax event. It does not reset prior tax years.
Instead, the real opportunity lies in executing the transition year correctly and positioning the business for normalized tax treatment going forward.
Schedule a time to discuss how cannabis rescheduling impacts your operations.
✍️ By Daniel Sabet, Cannabis CFO & Financial Advisor at @GreenGrowthCPAs. Daniel advises cannabis operators nationwide on finance, compliance, and strategy.
