By: Mark S. Horoupian, Esq. and Nick Richards, Esq.
The hemp industry is facing a rapidly shifting regulatory landscape that could significantly alter the financial and legal viability of many businesses. In the recent episode of TaxTalk x Cannabis Quick Hits, we break down the looming regulatory overhaul, its tax and bankruptcy implications, and the restructuring options available to hemp and cannabis companies navigating financial distress.
A Major Regulatory Shift for Hemp
There are sweeping changes to be expected that will redefine the hemp industry, including a move away from measuring hemp legality based solely on Delta-9 THC to a “total THC” standard. Under the proposed framework, products would be limited to 0.4 milligrams of total THC per package, and synthetic cannabinoids would be banned outright.
These changes could have far-reaching consequences. Hemp-derived THC products that exceed the new limits may be treated as Schedule I controlled substances, triggering the application of Internal Revenue Code Section 280E within one year. For many hemp operators, this would mean higher effective tax rates, reduced deductions, and increased financial strain during an already volatile period.
Bankruptcy Becomes Riskier After 2026
While hemp businesses can currently seek protection under the Bankruptcy Code, that option may narrow significantly after November 2026, once the one-year transition period expires.
The U.S. Trustee’s Office is likely to move to dismiss bankruptcy cases involving businesses that are engaged in what becomes an illegal enterprise under federal law. Even companies that file before the deadline could face dismissal if they continue prohibited operations post-petition. As a result, timing and strategic planning are essential.
Restructuring Before the Window Closes
Given the anticipated restrictions, hemp businesses should consider filing for bankruptcy sooner rather than later to restructure operations, shed debt, and exit lines of business that may soon be unlawful. Waiting until after the transition period could leave companies without access to federal bankruptcy relief.
Alternatives for Cannabis and Hemp Companies in Distress
For companies that cannot or should not pursue bankruptcy, there are alternative restructuring and wind-down options, including receiverships and Assignments for the Benefit of Creditors (ABCs).
Receiverships can allow businesses to continue operating under applicable state law while assets are stabilized or transitioned. ABCs, particularly in California, provide a streamlined, non-judicial process in which a company assigns its assets to a fiduciary for liquidation and distribution to creditors. While efficient, these tools require careful planning and are not one-size-fits-all solutions.
The Bottom Line
As the hemp industry moves toward a more restrictive regulatory framework, financial distress is likely to increase. Hemp and cannabis companies must act proactively, understand the narrowing restructuring options, and carefully evaluate timing, tax exposure, and operational risk. Early engagement with experienced counsel can make the difference between an orderly transition and a forced shutdown. Be sure to subscribe to our blog for more insights on hemp regulations, tax strategies, and restructuring options to keep your business compliant and resilient.
