In a stunning twist, the U.S. funding bill passed on November 12, 2025, has flipped the script on hemp sales, making them illegal again and potentially slamming businesses with hefty tax burdens under Section 280E. This rule, long a nightmare for cannabis operators, now threatens hemp firms too. But a clever fix is gaining traction: Employee Stock Ownership Plans, or ESOPs, which could wipe out those tax hits entirely. What’s the real story here, and how might it reshape the industry?
Section 280E of the Internal Revenue Code is no friend to companies dealing in controlled substances. It blocks them from deducting everyday business costs like rent, wages, and marketing, even if they’re legal at the state level. For cannabis firms, this has meant sky-high effective tax rates, sometimes up to 70%, turning profits into pipe dreams.
Hemp operators, once safe under the 2018 Farm Bill, now face the same pain after the recent reversal that criminalized hemp product sales. This change stems from a broader push to tighten federal controls, leaving many small growers and sellers scrambling. According to tax experts, this could force some businesses to shut down or pivot fast.
Take a typical cannabis dispensary. It might pull in $1 million in revenue but owe taxes on nearly all of it without deductions. That’s brutal. A 2025 report from the Tax Foundation highlights how this rule has drained over $2 billion in potential deductions from the industry since 2020 alone.
The why is simple: The law ties back to the Controlled Substances Act, labeling cannabis and now certain hemp items as Schedule I or II drugs. Even with state approvals in places like California and Colorado, Uncle Sam doesn’t budge on taxes.
How ESOPs Step In as a Tax Shield
Enter Employee Stock Ownership Plans, a smart ownership twist that’s buzzing in cannabis circles. An ESOP lets workers own shares of the company through a trust, and here’s the magic: If set up right as an S corporation, it can dodge Section 280E altogether. Why? Because ESOP-owned firms often qualify for tax exemptions on profits tied to employee ownership.
Recent moves show this isn’t just theory. In states like Oregon and Michigan, cannabis businesses have adopted ESOPs since 2023, slashing their tax bills dramatically. One operator in Portland reported cutting their effective rate from 65% to under 20% after the switch, per industry insights from 2025.
Setting one up isn’t a walk in the park, though. It involves valuations, legal hoops, and Department of Labor approvals. But the payoff? Owners sell shares tax-free in many cases, employees get a stake in success, and the business breathes easier without 280E looming.
- Boosts employee morale: Workers feel invested, leading to lower turnover.
- Aids succession planning: Perfect for founders looking to exit without huge tax hits.
- Potential downsides: High setup costs and complex rules can trip up smaller outfits.
Experts warn it’s not a one-size-fits-all. A 2025 study by the National Center for Employee Ownership found that while ESOPs work wonders for mid-sized firms, tiny startups might struggle with the paperwork.
Rescheduling Drama and Future Shifts
President Trump’s executive order on December 18, 2025, lit a fire under cannabis rescheduling, pushing to move it from Schedule I to III. If that happens, Section 280E could vanish overnight for many, letting businesses deduct expenses like any other.
This order prioritizes quick action, consulting Congress on hemp definitions too. It’s a game-changer, especially after Congress dropped language in a funding bill that would have blocked rescheduling. As of early 2026, the DEA is expediting reviews, with insiders predicting changes by mid-year.
For hemp, it’s murkier. The 2025 bill reversal means operators might still get hit unless rescheduling broadens to include them. One Colorado hemp farmer told reporters his sales dropped 40% post-bill, fearing tax woes could finish him off.
This rescheduling push offers hope, but it’s no guarantee, making ESOPs a timely backup plan. Data from MJBizDaily in late 2025 shows over 50 cannabis firms exploring ESOPs amid the uncertainty.
Real-World Wins and Warnings
Picture this: A Michigan cannabis grower, hammered by 280E, forms an ESOP in 2024. By 2025, they’re deducting costs fully, reinvesting savings into expansion. That’s not fiction; it’s happening, as noted in business reports from that year.
But pitfalls exist. Not every state allows ESOPs for cannabis due to ownership rules, and federal banking issues linger. Plus, if rescheduling flops, ESOPs might face new scrutiny.
A quick look at tax strategies beyond ESOPs:
| Strategy | How It Helps | Drawbacks |
|---|---|---|
| Section 471(c) Accounting | Increases COGS deductions | Complex calculations |
| R&D Credits | Offsets some taxes | Limited applicability |
| State Tax Breaks | Varies by location | Not federal relief |
These alternatives provide partial relief, but ESOPs stand out for their potential to neutralize 280E completely.
The human side? Employees in ESOP firms often see better retirement perks, fostering loyalty in a tough industry.
As the cannabis and hemp worlds navigate these tax storms, ESOPs emerge as a beacon of relief, potentially saving businesses from financial ruin while empowering workers. This shift not only eases burdens but sparks hope for a fairer playing field, turning what was once a punitive rule into an opportunity for growth.
Maria Garcia is an award-winning author who excels in creating engaging cannabis-centric articles that captivate audiences. Her versatile writing style allows her to cover a wide range of topics within the cannabis space, from advocacy and social justice to product reviews and lifestyle features. Maria’s dedication to promoting education and awareness about cannabis shines through in her thoughtfully curated content that resonates with both seasoned enthusiasts and newcomers alike.
