Last week, Congress passed a stopgap funding bill reopening the federal government and writing the final chapter for the legal intoxicating hemp industry. Intoxicating hemp is a $28 billion industry producing and selling intoxicating cannabis products in interstate commerce and in many states that have not legalized marijuana. The funding bill changed the definition of industrial hemp, limiting total THC content to 0.4 milligrams per container – a level far lower than current products. The change is set to take effect on November 12, 2026, and thereafter, intoxicating hemp will change from a legal consumer product to an illegal Schedule I controlled substance.
As the cannabis industry well knows, businesses that traffic in Schedule I controlled substances are denied many of the resources other businesses enjoy and are subject to crippling penalties. Examples include lack of banking, lending, and insurance, denial of bankruptcy protection, denial of First Amendment rights, and the dreaded IRC Section 280E. And, while there is still a year to fine-tune the new law before it goes into effect, it is important for hemp businesses to understand the implications of the change and perhaps begin taking steps now to survive.
Two of the biggest changes are bankruptcy and Section 280E. First, companies engaged in the illegal trafficking of controlled substances are shut out from the federal bankruptcy courts. Should the law remain, companies currently operating in the space need to understand that they are entitled to bankruptcy protection now – but will probably not be eligible for bankruptcy after November 12, 2026.
Companies considering shutting down should also be aware of the potential for personal liability. Owners and other responsible persons can be liable for unpaid employment taxes should they willfully fail to remit withholding to the IRS. Sales tax and some excise taxes also carry personal liability for owners and operators. Owners who pocket cash, leaving the creditors of the business empty-handed, also face personal liability. Income tax depends on the type of entity in which the business operates. Owners are liable for the income taxes of companies that are taxed as partnerships (S-Corp, LLC, partnership), but are not liable for the income taxes of C-Corps.
Section 280E further complicates owner liability issues because it disallows the deduction of business expenses, thereby creating phantom income subject to tax. The owner of a business that is subject to Section 280E pays income tax on funds she never receives – the result can be devastating. There are many early cannabis company owners who didn’t know of 280E and are burdened with multi-million dollar personal tax liabilities because they operated as LLCs taxed as partnerships. Many of these owners have since lost their businesses but have kept their tax liabilities – and as one might imagine, the IRS is not sympathetic. The intoxicating hemp industry needs to understand its exposure to Section 280E and plan for it.
There may also be limitations to recovering losses generated by defunct hemp companies. When a company goes out of business, it may generate losses that can be claimed by the owners. But if Section 280E applies, the losses could become non-deductible. Thus, it could be advantageous for a company to “go out of business” before November 12, 2026. Shuttering a company can be very complicated but generally involves liquidating the assets and paying the creditors, filing final tax and information returns, and filing a notice of dissolution.
With these changes on the horizon, it is critical that hemp companies review their current corporate structure, weigh their risk tolerance, analyze their profitability after the imposition of Section 280E, and plan for the coming change. We still don’t know what the states will do, and it is likely we will see different approaches. A state could create a legal intrastate market for intoxicating hemp, it could outlaw it altogether, fold it into a current marijuana industry, or ignore it. If the owners decide to close the business, it could be advantageous to do so quickly. If they decide to keep operating, they need to take precautions now to minimize Section 280E, limit personal liability, and survive in a rapidly changing landscape.
