280E Tax Reform: How Federal Changes Could Save NC/SC Hemp Businesses Millions.

A federal tax rule, known as Section 280E, has made it extremely challenging for cannabis companies to sustain themselves over time. This law prevents businesses from taking normal tax deductions, leading to some of the highest tax rates in the country. 

Now, the government is considering moving cannabis from a high-risk category to a lower one by shifting it from Schedule I to Schedule III, which would finally remove these heavy tax burdens. This change would be a huge relief for hemp operators in North and South Carolina. Since hemp is already a big part of the local farming scene, these new rules would help the regional economy grow much faster.

This article explains what 280E means and how recent federal changes could help hemp and cannabis businesses. It also examines why companies in North Carolina and South Carolina could reap significant benefits if these reforms are implemented.

What Is Section 280E and Why Does It Matter?

Section 280E is a federal tax rule that was passed in 1982. It stops businesses involved with controlled substances from claiming normal business deductions or tax credits. These companies can only deduct their cost of goods sold when calculating taxes. Unlike other businesses, they cannot deduct expenses like payroll, rent, utilities, or marketing.

This means that even when cannabis companies follow state laws and operate legally, the federal government still taxes them as if they were illegal drug dealers. As a result, many businesses face extremely high tax bills. In some cases, their effective tax rates can reach 60 to 80 percent.

For hemp businesses, this has led to a unique challenge. Even though the 2018 Farm Bill made industrial hemp legal at the federal level, the rules are still confusing. The lines blur even more for hemp products that contain THC-like compounds. Because of this overlap with cannabis laws, many operators continue to face difficult tax questions and regulatory limits.

Federal Reform in 2025: A Major Turning Point

In December 2025, President Donald Trump issued an executive order that told the Department of Justice to speed up the process of rescheduling cannabis. The goal was to move cannabis from Schedule I to Schedule III under the Controlled Substances Act. This decision followed a recommendation made by the Department of Health and Human Services in 2023.

Why Rescheduling Matters?

The most important part of this change is that Section 280E only applies to Schedule I and II substances. If cannabis moves to Schedule III, the rule would no longer apply. This would allow cannabis and some hemp businesses to claim normal tax deductions like other legal industries.

In practical terms:

• Normal business expenses such as salaries, rent, utilities, marketing, and compliance costs could be deducted before federal taxes are calculated.

• Federal income tax would be based on net income instead of gross revenue. This change would greatly reduce overall tax burdens.

• Businesses would see higher operating margins as taxes drop and cash flow improves.

This change is not in effect yet. The DOJ still needs to finalize the rule, and it may face public hearings or legal challenges. Even so, the move toward rescheduling marks a major shift for cannabis and hemp taxation.

How 280E Reform Could Save Hemp Businesses Millions?

Lower Taxes, Higher Profitability

Under current law, most legal hemp and cannabis businesses can only deduct their cost of goods sold. They cannot deduct normal operating expenses. This makes their taxable income appear higher and results in much larger federal tax bills. 

For example, on $1 million in revenue, a hypothetical business with $350,000 in ordinary expenses might:

• Pay federal tax on $450,000 under 280E (only COGS deducted)

• Pay federal tax on $100,000 if ordinary expenses were deductible

This creates a difference of hundreds of thousands in taxes annually. That money could instead be used for business growth, hiring, or investing in new opportunities. 

If cannabis is rescheduled, hemp businesses in North and South Carolina could get similar tax relief. Even though industrial hemp is legal under the 2018 Farm Bill, federal rules have still created challenges, such as limited banking access and high taxes. Treating hemp and cannabis like other industries for tax purposes would remove one of the biggest financial obstacles they face.

More Competitive and Sustainable Business Environment

When can hemp operators deduct ordinary expenses?

• Access to capital would improve because profits would look clearer and more accurate on financial statements.

• Smaller business owners would have a better chance to compete with larger companies.

• The industry would become more competitive as legal businesses could better compete with unregulated market segments that currently avoid taxes.

The National Cannabis Industry Association and other groups say that changing 280E could boost the economy, create more jobs, and increase federal revenue over time, even if short-term tax income drops

Specific Impacts on NC and SC Hemp Economies

North Carolina

North Carolina legalized industrial hemp under the 2018 Farm Bill and has active farming and processing. Still, uncertainty about state and federal rules has made the market cautious. Recent discussions on state hemp laws, including bills that could change product definitions, show how unclear regulations can create challenges for small farmers and operators. 

If 280E is reformed, clear federal tax relief would give North Carolina hemp businesses more financial stability and make growth easier to plan.

South Carolina

South Carolina also grows industrial hemp. Federal reform could create new opportunities for local businesses, especially in a state where banking access and tax planning have long been limited by federal cannabis rules.

Reduced tax liabilities could:

• Boost profitability for processors and retailers

• Encourage investment in high-value hemp products

• Support expansion into new markets such as wellness and textile applications

Broader Industry and Economic Implications

Banking and Compliance

Rescheduling would help beyond just taxes. It could also improve access to banking and insurance, which have long limited cannabis and hemp businesses from fully participating in the financial system.

Federal Revenue, Enforcement, and Policy

Critics say changing 280E could lower federal tax revenue. But supporters note that taxing businesses on net profit instead of gross revenue encourages compliance and makes the legal market more appealing than the illegal one.

This could lead to steady long-term revenue, more jobs, and less incentive for illegal operations. This is especially important in agricultural areas of North and South Carolina, where diversified crops help local economies.

What Happens Next?

Even though the Executive Order and federal guidance are important, the exact timing for official rescheduling and 280E relief is still unclear. Key steps include:

• DOJ administrative hearings and rulemaking

• Possible legal challenges from opponents

• IRS guidance on implementation and transition

• Congressional responses and potential legislative backup

Industry participants, tax experts, and business owners should watch regulatory updates closely and work with advisers to prepare their operations for the upcoming changes.

Conclusion

Federal reform of IRS Section 280E, linked to cannabis rescheduling to Schedule III, could provide major benefits for legal hemp and cannabis businesses in NC and SC. Potential impacts include millions in federal tax savings, higher profit margins, improved access to capital, and stronger long-term viability. Staying informed and participating in advocacy is crucial as policies evolve. A fairer tax system would not only strengthen individual businesses but also support rural economies, create jobs, and encourage local investment across both states.