Article by: Raza Lawrence and Ivy Perez-Bader

After more than fifty years of classification alongside heroin and LSD, cannabis may soon occupy the same legal category as ketamine and Tylenol with codeine. Following an Executive Order issued by President Trump in December 2025 directing the Attorney General to complete the rescheduling rulemaking process in an expeditious manner, reclassification of cannabis as a Schedule III substance under the Controlled Substances Act (CSA) remains under active federal consideration and, if finalized, would represent a significant inflection point for the U.S. cannabis industry. Although the federal tax implications may be substantial, they represent only one component of a broader regulatory realignment. The operational and compliance consequences of Schedule III status warrant equal attention, particularly for adult-use operators, for whom rescheduling may sharpen—rather than reduce—exposure to federal legal risk.

The Tax Shift: What Happens When Section 280E No Longer Applies

Section 280E disallows deductions and credits for businesses that “traffic” in controlled substances listed on Schedule I or II of the CSA. Under federal law, that concept of trafficking applies equally to state-licensed dispensaries and illegal drug operations. Although Section 280E would remain on the books following rescheduling, cannabis would no longer fall within its scope if it is moved to Schedule III. The result would be a fundamental change in the federal tax treatment of cannabis businesses.

The timing of that change remains uncertain. The Executive Order directs completion of the rulemaking process already underway following the Department of Justice’s May 2024 proposed rule to reschedule cannabis. That proposal received nearly 43,000 public comments and is currently awaiting an administrative law hearing required under 21 U.S.C. § 811. The hearing requirement cannot be bypassed by executive action, and litigation challenging a final rule could further extend the implementation timeline. Questions also remain regarding the effective date of any final rule and whether rescheduling would apply retroactively for tax-year purposes.

If rescheduling becomes effective, cannabis operators would be permitted to deduct ordinary and necessary business expenses—such as payroll, rent, marketing, and professional services—on the same basis as other lawful businesses. For some operators, the impact could be dramatic. Under current law, a dispensary generating $5 million in annual revenue with $4 million in operating expenses might—in high-margin scenarios—face an effective federal tax rate exceeding 70% because Section 280E disallows deductions for most operating expenses and limits relief largely to cost of goods sold. The business is therefore taxed on income that more closely resembles gross margin than true net profit. Removal of Section 280E would align taxable income more closely with actual economic earnings.

Rescheduling would also substantially reduce reliance on inventory capitalization strategies under Internal Revenue Code § 471. Under the current regime, operators attempt to allocate indirect costs into inventory to mitigate 280E’s disallowance of deductions—a complex and compliance-intensive approach that has generated significant audit exposure and litigation risk. If ordinary deductions are restored, much of this accounting distortion would become unnecessary. Financial reporting would more closely resemble conventional retail or consumer packaged goods models, improving comparability, transparency, and access to institutional debt and equity capital.

DEA and FDA Oversight: Tax Relief Is Not Deregulation

Any tax relief should not be conflated with deregulation. Schedule III substances remain subject to federal oversight by the Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA), including registration, recordkeeping, security, and manufacturing requirements within a “closed system” of distribution.

Entities seeking to participate in any federally authorized distribution channel would be required to obtain DEA registration—a requirement with no analog in current state licensing regimes, where businesses operate solely under state regulatory frameworks without federal registration or tracking. Businesses that choose—or are required—to participate in federally authorized channels would face materially different operational requirements.

Schedule III status would increase the practical relevance of federal oversight mechanisms to industry operations. It may increase scrutiny regarding Good Manufacturing Practices (GMPs), labeling standards, and product claims, particularly where businesses pursue medical positioning. Operators that invest in enhanced governance, internal controls, and compliance infrastructure may be better positioned if federal integration expands over time.

Strategic Divergence Within the Industry

State-licensed cannabis operators may need to reassess long-term strategic positioning. Some businesses—such as a vertically integrated retail operator focused on multi-state expansion—may continue operating primarily within state regulatory frameworks while accepting ongoing federal non-compliance as a calculated risk. Others—particularly cultivation, extraction, or product-development companies—may pursue pathways aligned with federally regulated pharmaceutical or controlled-substance models, including Investigational New Drug (IND) applications and FDA-supervised development strategies.

Each path entails distinct cost structures, regulatory burdens, and risk profiles. Rescheduling may therefore deepen structural divergence within the industry rather than promote uniform federal integration.

Adult-Use Markets and Continuing Federal Illegality

Schedule III reclassification would rest on a finding of accepted medical use. That premise would create a formal distinction between federally recognized medical use and continued federal prohibition of state-authorized adult-use markets. Even if cannabis is moved to Schedule III, recreational cannabis commerce would remain prohibited under federal law outside federally authorized channels.

Under Schedule I, all cannabis commerce is uniformly prohibited under federal law. Under Schedule III, a medical-use framework would exist alongside continued prohibition of recreational commerce, creating a more explicit distinction between authorized and unauthorized activity. That distinction could complicate corporate structuring, financing, and risk allocation in ways that the prior uniform prohibition did not.

Any federally compliant Schedule III distribution model would require a valid prescription issued by a DEA-registered practitioner and fulfillment through a DEA-registered pharmacy—requirements fundamentally incompatible with the current state-licensed dispensary model. Businesses operating in adult-use markets should evaluate adaptable corporate structures and contingency planning mechanisms in the event federal enforcement priorities or regulatory interpretations shift.

Implications for Hemp and CBD Markets

The December 2025 Executive Order also addresses hemp-derived cannabinoid products, directing development of a regulatory framework that includes potential THC-per-serving limits and CBD-to-THC ratio requirements.

In addition, Section 781 of Public Law 119-37 (the Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026) will reclassify certain full-spectrum CBD products as controlled substances under the CSA once it takes effect in November 2026. This statutory change narrows the practical distinction between certain hemp-derived products and marijuana under federal law and may eliminate portions of the regulatory arbitrage that have defined segments of the CBD market since passage of the 2018 Farm Bill.

Businesses with product lines spanning cannabis and hemp-derived cannabinoids should evaluate formulation, labeling, and distribution strategies in light of converging regulatory frameworks.

Transactional and Financing Effects: Reassessing Deal Structures

Rescheduling may necessitate reassessment of corporate structures and contractual arrangements negotiated under Section 280E-driven economics. Many management agreements, leases, earn-out structures, and financing arrangements were structured around elevated federal tax burdens and compliance risk.

Revised tax treatment could materially affect profitability assumptions, preferred equity returns, contingent payment structures, and credit covenants. Improved cash flow profiles may make the sector more attractive to certain institutional investors previously deterred by 280E-related distortions. Companies should proactively review key agreements to determine whether renegotiation or restructuring is appropriate.

Looking Ahead

Rescheduling is unlikely to reduce compliance expectations; rather, it may signal a transition toward greater federal institutionalization of the cannabis sector. Operators that invest in transparent governance, defensible accounting practices, and scalable compliance infrastructure will be better positioned as federal integration evolves.

Reclassification of cannabis as a Schedule III substance would likely provide meaningful economic relief while introducing a more complex compliance environment. A more consequential question may be whether a federal framework grounded exclusively in medical use can sustainably coexist with adult-use markets that generate the majority of industry revenue in the United States.

Selected Sources:

Exec. Order, Increasing Medical Marijuana and Cannabidiol Research (Dec. 18, 2025).
https://www.whitehouse.gov/presidential-actions/2025/12/increasing-medical-marijuana-and-cannabidiol-research/

Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026, Pub. L. No. 119-37, Div. B, § 781 (2025) (amending 7 U.S.C. § 1639o regarding hemp and total THC thresholds).
https://www.congress.gov/119/plaws/publ37/PLAW-119publ37.pdf

26 U.S.C. § 280E – Limitations on deductions for traffickers in controlled substances
https://www.law.cornell.edu/uscode/text/26/280E

DEA Diversion Control Division – Controlled Substance Scheduling and Compliance
https://www.deadiversion.usdoj.gov/

Congressional Research Service. Legal Consequences of Rescheduling Marijuana (LSB11105, Dec. 22, 2025).
https://www.congress.gov/crs-product/LSB11105

Congressional Research Service. Rescheduling Marijuana: Implications for Criminal and Collateral Consequences (IF12715, Dec. 30, 2025).
https://www.congress.gov/crs-product/IF12715

Congressional Research Service. Legal Effect of Marijuana Rescheduling on FDA’s Regulation of Cannabis (LSB11227, Sep. 16, 2024).
https://www.congress.gov/crs-product/LSB11227