Key Points

• DOJ reschedules state‑licensed medical marijuana to Schedule III, removing FDA‑approved cannabis and qualifying medical marijuana from Schedule I and marking a major shift in federal cannabis policy.
• Section 280E no longer applies to qualifying medical cannabis businesses, allowing business expense deductions under IRC Section 162 and delivering immediate federal tax relief.
• Recreational cannabis remains Schedule I, with IRS and Treasury guidance pending on expense apportionment, transition rules and potential retroactive tax relief; broader rescheduling will be revisited in a DOJ hearing set for June 2026.

Immediate Tax Relief

In a move that marks the most consequential shift in cannabis policy in over 50 years, federal officials have transferred FDA-approved marijuana products and marijuana subject to a state medical marijuana license from Schedule I to Schedule III of the Controlled Substances Act (CSA).

Cannabis companies covered by the order will see immediate tax relief as they are no longer handcuffed by Section 280E of the Internal Revenue Code and can begin deducting business expenses.

However, the order's scope is limited to medical marijuana, and significant uncertainty remains for recreational operators. Treasury and IRS guidance on expense apportionment, transition rules, and potential retrospective relief will be critical to determining the full extent of tax benefits.

What Happened and What’s Next?

On April 23, 2026, the Department of Justice and the Drug Enforcement Administration issued a final order transferring FDA-approved marijuana products and marijuana subject to a state medical marijuana license from Schedule I to Schedule III of the CSA. The order follows President Trump’s Dec.18, 2025 Executive Order asking DOJ to begin the rescheduling process.

Treasury and the IRS have already announced that they plan to issue guidance addressing the federal tax consequences of the final order. This order will have immediate impacts for cannabis companies due to the immediate inapplicability of Section 280E.

Scope of the Final Order

Importantly, the final order does not broadly reschedule all marijuana.

The order reschedules two categories of marijuana from Schedule I to Schedule III:

1. Drug products containing marijuana that have been approved by the FDA
2. Marijuana that is subject to a state-issued license to manufacture, distribute, or dispense marijuana for medical purposes.

The order covers marijuana as defined in the CSA, marijuana extracts, naturally derived delta-9-THC, and other compounds derived cannabis plants, but only to the extent those substances are incorporated into an FDA-approved product or covered by a qualifying state medical marijuana license.

Recreational marijuana, unlicensed bulk marijuana, marijuana extract not yet incorporated into an FDA-approved drug product, and synthetic marijuana all remain in Schedule I.

The DOJ has announced a new administrative hearing beginning June 29, 2026, to consider the broader rescheduling of all marijuana, including recreational marijuana, from Schedule I to Schedule III.

Relief from Section 280E

The most significant and immediate tax consequence of the final order is the removal of the Section 280E burden for qualifying state-licensed medical marijuana businesses. Because Schedule III substances fall outside the scope of Section 280E, the reclassification of medical marijuana from Schedule I to Schedule III means that Section 280E no longer prevents cannabis companies from claiming deductions for those expenses.

Qualifying businesses may now deduct ordinary and necessary business expenses under Section 162. This means that cannabis companies are no longer limited to deducting only cost of goods sold. This change could substantially reduce the tax burden on cannabis companies.

The Treasury Department and the IRS have announced that they expect to issue guidance addressing the principal federal tax issues arising from the final order. Specifically, Treasury and the IRS have indicated that the forthcoming guidance is expected to include a transition rule providing that, for purposes of Section 280E, rescheduling generally will be considered to first apply for a business's full taxable year that includes the effective date of the final order.

This transition rule suggests that qualifying medical marijuana businesses may receive Section 280E relief for the entirety of their taxable year that includes the effective date, rather than only prospectively from the date of the order itself. In other words, calendar year cannabis companies can deduct their expenses for all of 2026.

Broader Relief on the Horizon?

Notably, the final order also encourages the Treasury Department to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license.

For operators that hold both medical and recreational licenses, the effect of the order is more complex. Because the order reschedules only medical marijuana while recreational marijuana remains on Schedule I, mixed operators will need to apportion their expenses between medical and recreational activities. Treasury and the IRS have indicated that guidance will address this apportionment. In the meantime, dual-license operators should begin keeping detailed records showing the separation between medical and adult-use operations.

Entity Structuring and Tax Planning Considerations

The removal of Section 280E for medical cannabis businesses fundamentally changes the tax planning landscape. Entity classification choices, including partnerships, S corporation, C corporation and ESOP structures will be important for cannabis companies.

Companies will also need to make strategic investment decisions given new tax considerations and consider the applicability of business tax credits. Cannabis businesses should consult with tax advisors to ensure they are maximizing any potential tax benefits.

Conclusion

The rescheduling of state-licensed medical marijuana to Schedule III delivers tangible, immediate relief: qualifying businesses can now deduct ordinary and necessary expenses under Section 162, potentially reclaiming deductions for the full taxable year that includes the effective date.

That said, recreational marijuana remains on Schedule I, and dual-license operators face new apportionment challenges that await further Treasury and IRS guidance. With a broader rescheduling hearing set for June 2026 and retrospective relief still on the table, the regulatory landscape will continue to evolve. Cannabis companies should work closely with their counsel and tax advisers now to position themselves for every available benefit.

For more information, contact Joshua Horn at jhorn@foxrothschild.com, William Bogot at wbogot@foxrothschild.com, Meeren Amin at mamin@foxrothschild.com, or another member of Fox Rothschild’s Cannabis Law Practice Group or Taxation & Wealth Planning Department.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.