By Melissa Diaz, CPA | High Rock Accounting
If you run a state-licensed medical cannabis business (or hold a dual-use license), we all want to know whether rescheduling means you can get you tax money back for years 2022 through 2025. Unfortunately, nobody can answer that because the IRS Tax Court has not issued their position on the matter yet. But year-end is fast approaching. Here is where things stand and what to do before December 31.
What the rescheduling order says about prior years
In April, the DOJ ordered Schedule I state-licensed medical cannabis and FDA-approved products to Schedule III, which takes them outside the burden of Section 280E. The IRS has indicated that relief starts with the first full taxable year that includes the effective date. For a calendar-year medical operator, that is January 1, 2026.
The order does encourage Treasury to consider retrospective relief for years a state licensee operated under a medical license. But that language is a recommendation, not a requirement, and the order itself makes no determination of tax liability. As of today, the Treasury has not acted on it.
Two court cases to watch
That doesn’t mean progress is not happening and there are 2 court cases to watch closely. New Mexico Top Organics v. Commissioner is the furthest along. In March, the IRS filed its first detailed argument for why 280E still applies. The company replied in May, and the IRS responded again on July 31. The Tax Court asked both sides to brief whether it is bound by the DOJ’s decision not to make the order retroactive.
Terra Herbal, an Illinois dispensary operator, filed a Tax Court petition on June 30. The IRS assessed nearly $1 million in deficiencies and more than $580,000 in penalties for 2019 and 2020. Terra Herbal argues rescheduling corrects the classification, so 280E should not apply. The IRS’s August 19 answer acknowledged that the company may be allowed a cost of goods sold deduction. Neither case has produced a ruling.
Your three options for prior years
That leaves medical operators with three options.
Option one is amending. You file amended returns for open years and take the position that 280E does not apply. This carries the most risk. IRS audit activity in cannabis is at an all-time high, and the agency does not accept the non-280E position. If your 2025 return is not filed yet, a non-280E position requires a reasonable basis opinion from a law firm.
Option two is a protective claim. It preserves your right to a refund if the law changes in your favor, without demanding payment now. The general refund window is three years from filing or two years from payment, and the open years run roughly 2022 through 2025. A claim still puts your return in front of the IRS, so weigh that exposure with your tax attorney first.
Option three is waiting. It costs nothing today. But if the Tax Court rules your way after a year closes, you cannot claim it back. Is the claim worth the audit risk? I believe that depends on how many dollars 280E cost you in each open year, and you can calculate that number now.
What to do before December 31
Start with the math. For each open year, add up the deductions 280E disallowed and the tax you paid on them. Pull the general ledger detail, COGS workpapers, and filed returns that support it. Then have your tax attorney set a decision date for each year, tied to when its refund window closes.
Do not book the refund. Accounting rules generally keep you from recording a gain like this until it is realized. You also do not want to budget for a large cashflow event that remains hypothetical. Adult-use operators should also note that none of this applies to them. Adult-use deductions remain barred under 280E.
Keep 2026 clean too. If you hold a medical license, this is your first year of relief, and your records decide whether you keep it. If you hold a dual use license, now is the time to invest in a defensible approach to splitting medical and adult use sales, costs, and profits. Focus on 2026 first; protecting the year already approved by the IRS is the safer use of your time than chasing years you might not get.
KEY TAKEAWAY
Relief starts in 2026 for medical operators. Relief for earlier years depends on Treasury guidance or a court ruling, and neither exists yet. Calculate what 280E cost you in each open year, then decide with your tax attorney whether a protective claim makes sense.
Sources
MMJ Daily: Section 280E Litigation and IRS Audit Pressure Intensify (Foley Hoag analysis)
Forbes: The Tax Test On Cannabis Rescheduling And 280E
Canestrelli Tax Law: Cannabis and Section 280E
About the author
Melissa Diaz, CPA, is the co-owner of High Rock Accounting, a CPA firm providing outsourced accounting, fractional CFO services, and tax strategy to cannabis and peptide operators. She was named a 2026 Forbes Best-in-State CPA.
Questions about how this affects your business? Talk to our team at highrock.co/contact
This article is for general information and is not tax or legal advice.
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