“If cannabis no longer meets the definition of a Schedule I or II substance, then 280E no longer applies, regardless of its formal classification.”

By Justin Botillier, Calyx

Many cannabis industry observers know that one of the great benefits of federal rescheduling is that companies will be able to finally deduct ordinary business expenses on their tax returns. But what if we don’t have to wait for the rescheduling process to be finalized for the industry to finally achieve tax fairness on par with businesses in other sectors?

Most of us understand that Internal Revenue Service (IRS) rule 280E denies cannabis businesses the ability to deduct ordinary expenses, sometimes resulting in insurmountable tax debts. But what the tax code actually says is crucial. Specifically, it prohibits deductions for any trade or business that “consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”

Note that Congress chose the phrase “within the meaning of” rather than simply “listed as” a Schedule I or II substance. This subtle distinction opens the door to a powerful argument: If cannabis no longer meets the definition of a Schedule I or II substance, then 280E no longer applies, regardless of its formal classification.

The federal government itself is now in the process of undoing the outdated classification of cannabis as a Schedule I drug (a category reserved for the most dangerous substances like heroin, with “no accepted medical use”).

In late August 2023, the Department of Health and Human Services (HHS), relying on input from the Food and Drug Administration (FDA) and the National Institute on Drug Abuse (NIDA), officially recommended that cannabis be moved to Schedule III of the Controlled Substances Act (CSA)​. The recommendation came after a formal scientific review that concluded marijuana clearly “meets the three criteria for placing a substance in Schedule III​.”

In other words, HHS found that cannabis has a lower potential for abuse than Schedule I or II drugs, has accepted medical use and poses only moderate dependence risk. These are the hallmarks of a Schedule III substance.

It’s not just health agencies reaching this conclusion. The Department of Justice’s Office of Legal Counsel (OLC) issued an opinion in April 2024 supporting a far more reasonable test for a drug’s accepted medical use. OLC determined that DEA’s existing approach to evaluating “currently accepted medical use” was “impermissibly narrow,” and it endorsed the HHS two-part inquiry as a valid basis for recognizing medical use, even if the drug would not satisfy DEA’s current approach.

However, there is ambiguity about how “binding” the HHS rescheduling recommendation is on DEA. OLC’s opinion stated, “HHS’s determinations are binding until DEA initiates formal rulemaking, but it still must give HHS’s scientific and medical determinations significant deference​.” The legal language of the Controlled Substances Act provides that the HHS secretary’s scientific and medical findings are conclusive for scheduling decisions; DEA cannot overrule HHS on those points​.

In practice, this means DEA can’t simply ignore HHS’s conclusion that cannabis has medical use and lower abuse potential. While DEA hasn’t yet finalized rescheduling, it is legally obligated to incorporate HHS’s findings in its decision.

Even though the OLC memorandum contains some ambiguity about whether HHS’s recommendation is legally binding once rescheduling procedures begin, the more important takeaway is clear: HHS, along with FDA, NIDA and DOJ, have all acknowledged that cannabis no longer fits the characteristics of a Schedule I or II substance. From a tax perspective, that recognition alone raises serious questions about the continued applicability of 280E.

Despite the change in expert opinion, IRS has adamantly insisted that 280E remain in force until cannabis’s Schedule I status is officially changed via DEA rulemaking.

In mid-2024, as some cannabis companies began filing refund claims for past years’ taxes, IRS issued a stern reminder that nothing has legally changed “with respect to the schedule or classification of marijuana.” The agency flatly stated that amended returns seeking refunds of 280E taxes “are not entitled to a refund…these claims are not valid,” and warned it is taking steps to stop them​. In IRS’s view, as long as cannabis is listed as Schedule I, 280E applies—period. But this strict stance overlooks the exact language of 280E. The statute ties deductibility to the meaning of Schedule I or II status, not the formal label.

To insist 280E still applies because of a bureaucratic lag (DEA’s final rescheduling rule is indefinitely pending) is to elevate form over substance. Tax law, like any law, must be interpreted in context. If Congress intended 280E to hinge solely on a DEA scheduling label, it could have said so, but instead it pointed to the Controlled Substances Act’s criteria.

This isn’t the first time IRS has obstructed the industry’s attempts to use lawful tools to reduce the burden of 280E.

Allow me to reintroduce Internal Revenue Code Section 471(c), enacted under the Tax Cuts and Jobs Act of 2018. This provision allows qualifying small businesses, those with under $29 million in gross receipts, to use inventory accounting methods that conform to their own books and records. In doing so, cannabis operators can classify a much broader range of expenses, including items like facility rent and payroll, as inventory-related costs. These expenses, when properly capitalized, become part of the cost of goods sold and thus remain deductible, even under the constraints of 280E.

In 2021, however, IRS issued regulatory “guidance” stating that 471(c) could not be used to deduct expenses that were “otherwise disallowed” by another section of the tax code, effectively attempting to block cannabis operators from using it to mitigate 280E, which successfully deterred most accountants from using the method for years. But that guidance was not based on statutory law or court precedent; it was a regulatory interpretation meant to curtail a legitimate provision of the tax code. The regulation has no explicit legal language excluding cannabis businesses from using 471(c), and many tax professionals continue to rely on it as a now conservative, defensible strategy. For “smaller” operators, under $29 million in gross receipts, this remains one of the most practical ways to reduce tax liability while remaining fully compliant with existing law.

The reason this point bears emphasis is that while IRS may issue strongly worded notices or guidance to discourage certain tax positions, its actual enforcement behavior often tells a different story. When a return is prepared in good faith, by a qualified professional, and based on a reasonable interpretation of the tax code, IRS may choose not to pursue it, particularly when the position is well-documented and legally defensible. This dynamic has played out with 471(c), despite early warnings, IRS has not disputed the strategy in tax court.

While not without risk, the opportunity to amend past returns and seek refunds is real, and for some, the potential relief could be significant. Others may choose simply to move forward, leaving the past in the past, and begin preparing returns without complying going forward. Both choices are bold. But when grounded in a well reasoned tax position, supported by qualified professionals and weighed against the ongoing cost of overpayment, many may find it worth the risk.

Justin Botillier is co-founder and CEO of Calyx CPA, a firm specializing in tax preparation, accounting and business consulting for the cannabis and psychedelic industries. With two decades of experience in taxation and over a decade serving the cannabis industry, Justin and his team have helped clients save millions of dollars by leveraging aggressive and defensible strategies to mitigate the impact of 280E.

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