What the New Federal Restrictions Mean for Your Tax Compliance
On November 13, 2025, Congress closed what opponents called the “intoxicating hemp loophole” in the 2018 Farm Bill. For the booming market in hemp-derived beverages, Delta-8 THC products, THCA flower, and other intoxicating cannabinoid products, the clock is now ticking on a 365-day runway before these products become Schedule I controlled substances under the Controlled Substances Act.
For those of us who work with cannabis and hemp businesses, we know exactly what Schedule I reclassification means: Section 280E of the Internal Revenue Code.
Section 280E prohibits businesses from deducting ordinary and necessary business expenses if they’re trafficking in Schedule I or Schedule II controlled substances. The only deductions allowed are Cost of Goods Sold, and even that requires meticulous documentation. What does this mean practically? A business with a 40% gross margin that normally pays tax on a 10% net profit will instead pay tax on the entire 40% gross profit because rent, salaries, marketing, insurance, utilities, and virtually all other operating expenses become non-deductible. The effective tax rate can easily exceed 70% of actual profit.
Until now, compliant hemp businesses have been exempt from 280E because their products met the Farm Bill’s definition of hemp. That exemption ends January 1, 2027.
The agricultural appropriations bill fundamentally rewrites the definition of federally legal hemp. Products containing more than 0.4 milligrams of total THC per container will be reclassified as Schedule I marijuana, along with any cannabinoid synthesized outside the plant and non-naturally occurring cannabinoids like THCO and HHC. Non-intoxicating CBD products and industrial hemp that remain compliant with the new stricter definition will continue to be protected from 280E.
If your hemp business currently uses cash-basis accounting or doesn’t track Cost of Goods Sold meticulously, that needs to change immediately. Under 280E, COGS is your only shield against complete tax devastation. You need to switch to accrual accounting, implement robust inventory tracking systems, and document your cost accounting methods in writing.
Many hemp operators sell both intoxicating products and non-intoxicating products, creating significant complexity. You may need to maintain separate books and records for each line of business, allocate shared expenses between 280E-subject and non-280E businesses, and potentially restructure into separate legal entities. The IRS has been aggressive in cannabis cases about disallowing expense allocations, so you need bulletproof documentation.
The 2026 tax year represents your last year of normal deductibility for intoxicating hemp products. Consider accelerating deductible expenses into 2026 where possible and prepaying 2027 expenses if they’re deductible under your accounting method.
Some businesses can reformulate products to meet the new 0.4mg total THC per container limit and remain outside 280E entirely. Others may transition to state-licensed cannabis operations where they’ll face 280E but operate in a more stable regulatory environment. Still others may determine that profitability under 280E is impossible and use the 365-day runway for a strategic wind-down.
Whatever path you choose, your records need to be audit-proof now. Item-level inventory tracking, documented expense classifications, product line segregation, and cash reserves for estimated tax payments are no longer optional. The hemp industry’s tax reckoning is coming, and time to prepare is running out. Legal cannabis business owners will tell you that failure to get out in front of 280E is a small business death sentence.
Contact us for a free consultation to learn how we can help. Grow@cultivateconsulting.co
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
