What Rescheduling Left Behind
The federal government just lifted one of the tax barriers crushing cannabis operators. It lifted it for the ones who needed help least.
Over the past two fiscal years, Massachusetts has distributed roughly $55 million in grants to cannabis social equity businesses through the Cannabis Social Equity Trust Fund. Individual awards have ranged from $25,000 to $500,000, covering rent, payroll, debt service, and capital costs to get a licensed operation off the ground. In FY25, 181 businesses received funding, and in FY26, another 194. The money comes from cannabis sales tax revenue, administered by the state’s Executive Office of Economic Development, and it goes exclusively to entrepreneurs from communities disproportionately harmed by cannabis prohibition. It is, by design, a state government patching a federal policy gap. Every dollar in that fund exists because the federal government refused to treat cannabis businesses like any other legal industry.
A federal Schedule I classification has meant that cannabis businesses can’t access federal banking services, federal small-business loans, or take standard federal tax deductions. Specifically, under Section 280E of the Internal Revenue Code, businesses that deal in Schedule I or II controlled substances can’t deduct ordinary operating expenses like rent, payroll, utilities, and insurance from their federal tax burden. Where a restaurant or a hardware store pays federal taxes on profit alone, a cannabis business pays on gross revenue. Whitney Economics has estimated that effective federal tax rates for cannabis operators range from 70 to 80 percent, compared to the standard 21 percent corporate rate.
That tax burden sits atop startup costs that already dwarf those of most small businesses. Depending on the state, opening a single dispensary can require anywhere from $250,000 to over $2 million in upfront capital, and many states require applicants to prove $150,000 to $250,000 in liquid assets just to qualify for a license. Without access to federal lending or tax relief, states have tried to reduce those barriers on their own. Massachusetts, Maryland, Illinois, New York, Connecticut, Minnesota, Washington, and California have all built equity-specific grant or loan programs to help undercapitalized operators cover costs the federal government won’t. Last week, the federal government took a step toward changing that. But not for everyone.
On April 23, the Acting Attorney General signed a final order rescheduling certain cannabis products from Schedule I to Schedule III. Schedule III now covers two categories: FDA-approved drug products containing cannabis, and cannabis held under a state medical license. The entire adult-use market, every recreational dispensary in every legal state, remains Schedule I.
For the operators the order does cover, the most immediate change is 280E relief. State medical licensees can now deduct ordinary business expenses from their federal taxes, the same thing every other legal business in the country already does. But medical licensing predates adult-use in every state that has both, and medical licenses have historically been held by larger, better-capitalized operators, many of them multi-state companies that established themselves in medical markets years before adult-use programs launched.
When states built adult-use markets, they did so with a different goal in mind. Many states explicitly framed adult-use legalization as a rejection of the War on Drugs and its disproportionate harms to Black and brown communities. The operators most structurally tied to that project, the ones who entered the industry through equity licensing pathways, are overwhelmingly in adult-use markets. They’re still paying 280E. Still locked out of federal banking. Still Schedule I. The federal government just selectively lifted one of the barriers crushing cannabis operators, and it lifted it for the ones who needed that help least.
The operators who didn’t get relief are the ones already operating without a safety net. When a business can’t access traditional bank loans or federal small-business financing, it doesn’t stop needing capital; instead, it’s forced to find it elsewhere. In cannabis, that has meant private lenders charging interest rates far above market, investors demanding outsized equity stakes, and financing arrangements that leave the person whose name is on the license with less and less of the company they built. The operators who can absorb those terms are the ones who came in with capital already. The ones who can’t are often those who entered through equity pathways, with priority licensing but no corresponding access to the money needed to actually use a license.
280E is what makes this cycle self-perpetuating. It doesn’t just hit at startup; it compounds every year you operate. When you can’t deduct your operating costs, every dollar of revenue gets taxed before you’ve paid rent or made payroll, and the margin to survive on your own keeps shrinking. Lifting 280E on adult-use cannabis wouldn’t just save operators money on taxes. It would widen margins enough for small businesses to stay profitable without giving up equity stakes to private lenders in exchange for the capital that banks won’t provide.
But the order doesn’t stop at forward-looking relief. On page 23, the Acting Attorney General encourages the Secretary of the Treasury to consider providing retrospective relief from 280E liability for taxable years in which a state licensee operated under a state medical license. That means potential refunds for prior years of taxes already paid.
Consider Trulieve, a billion-dollar multi-state operator that filed amended federal tax returns in 2023 claiming $143 million in 280E refunds and received $113 million back from the IRS. When asked for the legal basis, CEO Kim Rivers called the strategy a “trade secret.” Retrospective relief under this order might just be that trade secret.
An equity licensee in an adult-use market paid the same 280E rates during those same years, on the same product, in an industry separated by a licensing distinction rather than any real difference in what’s being sold. The operators with historic access to capital get relief, while small businesses and entrepreneurs keep paying. The competitive distance between them only grows from here, because the operators who can now deduct their expenses and reclaim prior taxes have an even larger advantage over those who can’t.
Under the current order, the federal government is taking the first steps in sorting cannabis operators into two tiers. Schedule III for the pharmaceutical industry and established medical capital. Schedule I for the adult-use markets where equity programs tried to produce Black and brown ownership. The communities that bore the costs of prohibition are concentrated in the tier that got nothing. Rescheduling without adult-use relief isn’t a step toward equity. It is the federal government ratifying, in the tax code, the same divide that legalization was supposed to close.
Luckily, Massachusetts will keep writing checks from the Trust Fund and will keep distributing cannabis sales tax revenue to the entrepreneurs the federal government just passed over. In FY27, there will probably be another round of grants, another few hundred applications, and another set of awards covering rent, payroll, and debt service for businesses that still can’t deduct those expenses from their federal taxes.
The operators who most needed 280E relief aren’t getting it. And while there could be more changes coming for cannabis down the line, right now, the federal government looked at an industry built on the promise of equity and decided who deserved relief. The answer was not the people to whom the promise was made.