The Tax Shift That Changes the Math: Part 2

Rescheduling has direct implications for federal taxation. Under Schedule I, cannabis operators have been subject to Section 280E of the Internal Revenue Code. That provision disallows deductions for ordinary business expenses for companies trafficking in Schedule I or II substances. Cost of goods sold remained deductible, but expenses such as rent, payroll, marketing, insurance, and professional services were not.

For compliant operators, this often resulted in effective federal tax rates in the range of 70–80%, compared to a standard corporate rate near 21%.¹ Whitney Economics estimates that cannabis businesses have paid approximately $15 billion in additional federal taxes under 280E since 2018.²

The change to Schedule III alters that treatment for qualifying medical operations. Section 280E applies only to Schedule I and II substances. Moving medical cannabis to Schedule III removes it from that scope. Estimates from the Cannabis Regulators Association suggest effective federal tax rates for qualifying businesses could move closer to 20–30%.¹

The impact differs by operator. For businesses operating exclusively in medical markets, the transition is more straightforward. For operators with both medical and adult-use exposure, it is not. Adult-use cannabis remains Schedule I, and those revenues remain subject to 280E unless broader rescheduling occurs.³

This creates a need for expense allocation. Costs will need to be separated between qualifying medical operations and adult-use activities. The IRS has not yet provided formal guidance on how this should be handled. A reasonable interpretation at this stage is that expenses incurred prior to April 23 follow prior treatment, while expenses tied to qualifying medical operations after that date are evaluated under the new classification.⁴

Retroactive relief remains uncertain. The DOJ order encourages the Treasury Department to consider prior-year treatment, but it does not require it.⁵ The U.S. Department of the Treasury and the Internal Revenue Service have indicated that guidance is forthcoming, including how to address mixed business activities.⁶

Amended filings may carry risk. Tax counsel should be involved before pursuing retroactive claims. The order applies Schedule III treatment beginning January 1, 2026. For most companies, this makes 2026 the first full tax year under the updated framework. Fiscal year filers may need to account for periods before and after the effective date.⁴

This change does not resolve all structural issues in the industry. It removes a significant tax constraint for qualifying operators and changes how cash flow is retained and deployed.

Strategizing Exposure: Active Management in a Volatile Space

Given the complexities of state-versus-federal regulations and the volatility of the cannabis industry, active management is a critical tool for navigating this sector.

 AdvisorShares provides three distinct pathways for professional portfolios: 

1. Pure U.S. Exposure | AdvisorShares Pure US Cannabis ETF (MSOS): The largest U.S.-focused cannabis ETF, concentrated in top MSOs with scale and market share. 

2. Global Diversification | AdvisorShares Pure Cannabis ETF (YOLO): Provides exposure to both U.S. and international cannabis markets. 

3. Magnified Exposure | AdvisorShares MSOS Daily Leveraged ETF (MSOX): A daily leveraged ETF for sophisticated investors seeking to amplify exposure or overweight the theme with less cash. 

Are Your Clients Positioned for the Rescheduling Shift?

As the federal landscape evolves, the gap between cannabis "potential" and "performance" is narrowing. Schedule time with us to learn how our actively managed strategies can fit into a diversified portfolio and what makes our approach to cannabis investing different.