Metro Detroit cannabis attorney warns of possible tax clawbacks as new federal filings complicate marijuana rescheduling and potentially delay substantial tax savings.
DETROIT — A Michigan marijuana dispensary generating $5 million in annual sales could potentially save $315,000 a year in federal taxes if Washington changes marijuana’s federal classification. But new legal challenges threaten to complicate that relief — and could create unexpected tax bills for some medical marijuana businesses.
Metro Detroit cannabis attorney Thomas M.J. Lavigne of Cannabis Counsel, a former chairman of the State Bar of Michigan’s Cannabis Law Section, warns that medical marijuana businesses claiming federal tax deductions under the Trump administration’s new rules could face additional taxes, interest and possible penalties if a federal appeals court overturns the policy and gives its ruling retroactive effect.
Meanwhile, recreational marijuana businesses — which account for nearly all Michigan cannabis sales — remain subject to federal tax restrictions that prevent them from deducting many ordinary operating expenses.
The legal fight could extend into 2027, leaving business owners wondering when they might receive federal tax relief and whether the medical marijuana tax benefits already granted will survive.
Why Cannabis Businesses Pay More Federal Taxes
Most businesses can deduct expenses such as employee wages, rent, utilities and advertising before calculating federal income taxes.
Recreational marijuana businesses generally cannot.
That’s because of Section 280E of the Internal Revenue Code, which prevents businesses dealing in Schedule I or II controlled substances from deducting many ordinary operating expenses.
The result can be painful: A marijuana dispensary might earn a relatively small profit but owe federal income taxes calculated on a much larger amount.
The Trump administration’s April 2026 medical marijuana rescheduling order moved qualifying medical marijuana from Schedule I to Schedule III, removing the Section 280E restriction for qualifying medical activities.
But recreational marijuana remains Schedule I.
That distinction is particularly important in Michigan, where recreational sales account for more than 99% of the state’s marijuana retail market, according to Michigan Cannabis Regulatory Agency sales reports.
How a $5 Million Dispensary Could Save $315,000
Lavigne provided an example showing how broader federal rescheduling could affect a hypothetical Michigan dispensary generating $5 million in annual recreational marijuana sales.
The business has $2.5 million in inventory costs and another $1.5 million in operating expenses, leaving $1 million in actual operating profit.
Under Section 280E, the business generally cannot deduct the $1.5 million in operating expenses. As a result, its federal taxable income would be $2.5 million rather than $1 million.
For a corporation paying the 21% federal income tax rate, the difference is substantial.
Annual federal tax Amount With Section 280E $525,000 Without Section 280E $210,000 Potential annual savings $315,000 The example assumes a C corporation, qualifying inventory costs and no other tax adjustments. Actual savings depend on the business’s tax structure, expenses and accounting methods.
For a dispensary struggling with declining marijuana prices and rising costs, that difference could determine whether it expands, hires additional workers or simply remains profitable.
Could Medical Marijuana Businesses Face Back Taxes?
Lavigne identifies another concern involving the federal government’s decision to move qualifying medical marijuana into Schedule III.
Opponents have challenged the administration’s authority to make that change.
If the appeals court invalidates the order and gives its decision retroactive effect, Lavigne warns that businesses claiming deductions under the new classification could face additional federal tax assessments.
Those potential consequences include previously disallowed deductions, interest charges and, depending on the circumstances, penalties.
Businesses might also need to revise financial statements or reconsider tax reserves.
However, no court has ordered such tax repayments, and the IRS has not announced a clawback program tied to this litigation.
The possibility depends on the outcome of the lawsuit and how any ruling is applied.
Lavigne recommends that operators retain detailed accounting records and documentation supporting their tax decisions.
New Federal Filings Could Delay Recreational Marijuana Tax Relief
A separate federal proceeding that could eventually provide tax relief to recreational marijuana businesses faces another potential delay.
The Drug Enforcement Administration’s marijuana rescheduling proceeding is considering whether marijuana should be moved more broadly from Schedule I to Schedule III.
The latest dispute concerns a September 23 Government Accountability Office report that identified gaps in the DEA’s and Food and Drug Administration’s written procedures for evaluating controlled substances.
The report recommended that both agencies develop more comprehensive policies and procedures. It did not determine whether marijuana should remain in Schedule I or move to Schedule III.
In an October 9 response, the DEA said it would defer to the administrative law judge on whether the GAO report should be admitted into the hearing record. However, the agency opposed additional briefing that could prolong the proceedings.
On October 13, Smart Approaches to Marijuana and the states of Idaho, Indiana and Nebraska submitted a joint response asking the judge to admit the report and permit further arguments about its significance.
The opponents contend that the GAO findings raise important questions about federal drug-scheduling procedures.
The DEA argues that the report identifies shortcomings in written procedures rather than flaws in the scientific analysis supporting rescheduling.
As of October 14, MITechNews had not independently confirmed a new ruling resolving the dispute.
For Michigan and Ohio recreational marijuana businesses, the disagreement creates another potential obstacle in the effort to eliminate Section 280E restrictions.
Lavigne believes legal challenges to the government’s rescheduling procedures could complicate the broader effort.
However, the administrative dispute does not itself overturn the existing medical marijuana order or establish that recreational rescheduling will fail.
The dispute could become more complicated. According to Marijuana Moment’s October 13 report, the National Drug and Alcohol Screening Association, DUID Victim Voices and physician Kenneth Finn have separately asked DEA Chief Administrative Law Judge Derek Julius to reopen the hearing for limited document discovery and additional testimony.
They want to examine how federal officials developed the medical-use test supporting marijuana’s proposed move to Schedule III and whether the agencies adequately considered public-health evidence. The DEA maintains that the Government Accountability Office report identifies gaps in written procedures, not flaws in the underlying scientific analysis. Julius has not yet ruled on the requests. If he permits additional evidence and testimony, the proceedings could take longer, potentially delaying federal tax relief for Michigan and Ohio recreational cannabis businesses.
Michigan’s 24% Wholesale Tax Adds Pressure
Michigan cannabis businesses face an additional challenge: the state’s 24% wholesale marijuana tax, which took effect January 1, 2026.
According to the Michigan Department of Treasury’s official guidance, the tax applies to qualifying wholesale sales or transfers of adult-use marijuana. Wholesalers are legally responsible for remitting the tax, although they may pass the cost along to retailers.
The tax comes in addition to Michigan’s existing 10% retail marijuana excise tax and 6% sales tax.
Lavigne argues that the combination of Michigan’s wholesale tax and Section 280E can put enormous pressure on businesses with already thin profit margins.
Even when operating profits decline, federal taxable income can remain relatively high because ordinary business expenses cannot be deducted.
Eliminating Section 280E could give businesses additional cash to pay employees, reduce debt or absorb rising costs.
However, federal marijuana rescheduling would not eliminate Michigan’s wholesale tax. The state tax remains a separate legal and political issue.
Ohio Cannabis Businesses Also Have Money at Stake
Ohio’s growing recreational marijuana industry faces many of the same federal tax restrictions.
Businesses selling both medical and recreational marijuana must distinguish between qualifying medical activities and recreational operations when preparing their federal tax returns.
Lavigne advises operators to maintain detailed records separating medical and recreational sales and expenses.
That can include tracking inventory, employee responsibilities and shared business expenses.
Broader federal rescheduling could eventually reduce federal taxes for recreational marijuana businesses in both states.
Federal Appeals Court Fight Could Continue Into 2027
The Justice Department announced its limited medical marijuana rescheduling action in April 2026.
Opponents argue that the administration exceeded its authority or failed to follow required federal procedures. The Justice Department is defending the order.
The legal challenges are before the U.S. Court of Appeals for the District of Columbia Circuit.
On October 9, the parties proposed a schedule for written arguments extending through February 19, 2027.
That is a proposed filing deadline, not a date when the court is expected to rule.
The appeals court previously declined to suspend the medical marijuana order while litigation proceeds, leaving it in effect pending further legal action.
What Cannabis Business Owners Should Do Now
For Michigan and Ohio cannabis operators, the most important takeaway is that broader federal tax relief remains uncertain.
Businesses should continue following the tax rules applicable to their operations rather than assuming recreational marijuana will soon qualify for Schedule III treatment.
Operators with medical and recreational sales should consult qualified cannabis tax professionals about allocating expenses, maintaining records and assessing potential legal risks.
Businesses considering expansion or major investments should also be cautious about counting on future federal tax savings before the rules actually change.
For Michigan and Ohio cannabis businesses, the potential financial rewards of broader rescheduling are substantial. But so are the uncertainties surrounding when — or whether — that relief will arrive.
