Cannabis tax relief is here, for some

In January, I wrote that 2026 could be a turning point for the cannabis industry. On Thursday, the Department of Justice made it one, but only in part.

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On April 23, Acting Attorney General Todd Blanche signed an order placing two categories of marijuana products in Schedule III of the Controlled Substances Act: FDA-approved products containing marijuana, and marijuana products regulated by a qualifying state-issued medical marijuana license. The order took effect the same day.

This is the first time in more than 50 years that the federal government has moved any marijuana products out of Schedule I. But it is not the blanket rescheduling the industry had hoped for. Adult-use recreational marijuana remains in Schedule I, and the order raises immediate tax, regulatory and compliance questions for advisors.

That same day, Treasury and the IRS issued a press release announcing they plan to publish guidance addressing the federal tax consequences of the DOJ Final Order. 

How we got here

In August 2023, the Department of Health and Human Services issued a report recommending cannabis be moved from Schedule I to Schedule III. In May 2024, the Drug Enforcement Administration published a Notice of Proposed Rulemaking in the Federal Register proposing that broader move.

An administrative hearing was scheduled for Jan. 21, 2025. One week before that date, the DEA announced that the hearing was postponed pending resolution of an interlocutory appeal filed by a party in the proceeding. The administrative law judge who had been assigned to the case later retired without rescheduling it. The proceeding stalled.

On Dec. 18, 2025, President Trump signed Executive Order 14370, “Increasing Medical Marijuana and Cannabidiol Research,” directing the attorney general to move as quickly as practicable.

The April 23 DOJ order is the administration’s response. Rather than wait for the full rulemaking process under 21 U.S.C. 811(a), which requires an HHS scientific evaluation, DEA findings on eight statutory factors and formal notice-and-comment rulemaking, the DOJ acted under a different provision. Blanche used the attorney general’s authority under 21 U.S.C. 811(d)(1) to reschedule controlled substances to carry out U.S. obligations under the Single Convention on Narcotic Drugs.

That provision has never been used for a substance of this scale. Whether courts will uphold this approach is an open question. If a legal challenge succeeds, the reclassification could be reversed or enjoined. Advisors should flag this risk to clients.

The DOJ’s Final Order places marijuana contained in FDA-approved products or subject to a state medical marijuana license, as well as certain marijuana extracts and certain naturally derived delta-9-tetrahydrocannabinols, in Schedule III. Unlicensed marijuana crops, bulk marijuana and any marijuana or marijuana extract not yet incorporated into an FDA-approved drug product remain in Schedule I.

The DOJ also terminated the prior Biden-era rescheduling proceeding and directed the DEA to hold a new expedited administrative hearing beginning June 29, 2026. That hearing must conclude by July 15, 2026. It will address whether broader changes to marijuana’s federal status should follow, including whether adult-use recreational marijuana could eventually move to Schedule III as well.

Section 280E matters

Section 280E of the Internal Revenue Code applies to businesses trafficking in Schedule I or II controlled substances. It blocks deductions for ordinary business expenses, while Schedule III substances fall outside its scope.

Until now, cannabis businesses operating under state law generally could not deduct basic expenses such as rent, payroll or marketing. They could recover the cost of goods sold, but little else, which often drove effective tax rates to punishing levels.

The April 23 order materially changes that analysis for medical cannabis operators covered by the new Schedule III treatment. Qualifying medical marijuana businesses should now be able to deduct ordinary and necessary business expenses under Section 162.

But the key distinction remains. Adult-use recreational marijuana stays in Schedule I, so businesses selling only recreational cannabis remain subject to Section 280E.

Treasury and IRS step in

The same day the DOJ order took effect, the Treasury and the IRS announced they expect the rescheduling to have “significant positive tax consequences” for businesses in the medical marijuana industry. They plan to issue guidance addressing the principal federal tax issues stemming from the Final Order.

Three points from the Treasury announcement matter most for practitioners:

First, the Treasury and the IRS confirmed that rescheduling generally removes Section 280E as a bar to claiming deductions and credits for businesses that, as a result of the Final Order, no longer traffic in Schedule I or II controlled substances under the CSA.

Second, for businesses with multiple activities, the forthcoming guidance is expected to clarify how Section 280E applies only to those activities related to trafficking in Schedule I or II controlled substances. The Treasury specifically referenced apportioning expenses between qualifying medical operations and operations that remain subject to 280E. This is the allocation methodology question that practitioners have been waiting on.

Third, the guidance is expected to include a transition rule. 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, for the business’s activities that do not involve Schedule I or II controlled substances as a result of the Final Order. That means businesses will not need to split their taxable year at April 23. The relief applies to the entire taxable year that straddles the effective date, for qualifying activities.

What the order does not do

It does not reschedule recreational marijuana. It does not legalize marijuana federally. It also does not resolve the banking problem.

Cannabis remains federally illegal outside FDA-approved uses and the state-licensed medical category recognized in the new DOJ order. Financial institutions may still hesitate to serve the industry unless Congress enacts specific reforms or regulators revise existing guidance.

That said, lower effective tax rates and stronger earnings may make qualifying medical operators more attractive to lenders and investors. In markets where local institutions already serve cannabis businesses, improved after-tax economics could expand access to credit and basic banking services.

Schedule III also creates a long-term regulatory tension. Schedule III drugs are subject to federal prescription requirements under the CSA. The federal government still has not explained how DEA and FDA requirements will fit with the existing state dispensary model, which does not operate on a prescription basis. That is one reason why advisors should treat the current change as significant but incomplete.

The questions advisors need to track

What qualifies as a qualifying state-issued license? The DOJ uses the phrase but does not define it in detail. The White House has emphasized that 40 states and the District of Columbia have state- or locally sanctioned regulated medical marijuana programs, but the federal order does not yet answer whether every form of state medical licensure will qualify.

What about amended returns? The order does not appear to be retroactive. The transition rule addresses the current taxable year, not prior periods. For now, prior periods remain governed by the law in effect at the time, unless the forthcoming Treasury and IRS guidance says otherwise.

Will the June hearing lead to full rescheduling? The DEA’s new expedited hearing begins June 29, 2026, and must conclude by July 15, 2026. That is a 16-day window. The prior hearing process collapsed in part because of the volume of parties seeking to testify. Whether this compressed timeline holds is an open question.

Is the reclassification itself legally durable? The DOJ used the attorney general’s treaty-implementation authority under 811(d)(1) rather than the standard rulemaking process under 811(a). That authority has never been tested at this scale. A successful legal challenge could unwind the Schedule III placement for medical marijuana. Advisors should monitor litigation and counsel clients accordingly.

What advisors should do now

First, separate medical and recreational operations in your clients’ books. If a client holds both license types, establish a defensible expense allocation methodology now and document it carefully. The forthcoming Treasury guidance on apportionment will set the framework, but the underlying recordkeeping needs to start immediately.

Second, continue to apply Section 280E to all recreational cannabis operations and to all periods before April 23, 2026. Maximize allowable cost of goods sold and maintain detailed records.

Third, apply the transition rule. Based on the Treasury announcement, Section 280E relief for qualifying medical operations should apply to the full taxable year that includes April 23, 2026. For calendar-year taxpayers, that means the entire 2026 tax year. Adjust estimated tax payments accordingly.

Fourth, run scenarios. Model cash flow, estimated tax payments and valuation changes under a framework where Section 162 deductions are available for qualifying medical operations, then compare that with the prior 280E-heavy model.

Fifth, watch for the guidance. The Treasury and the IRS have committed to issuing it. When it arrives, it should answer the allocation methodology question, confirm the transition rule details, and potentially address amended returns. Until then, document your positions and the basis for them.

Sixth, review entity structures. Many operators built separate entities, management agreements and licensing arrangements to manage 280E exposure. For medical-only operators, some of those structures may need to be revisited. For dual-license operators, the analysis is more complex.

Seventh, watch the June 29 hearing closely. Its outcome will determine whether this remains a partial fix for the medical side of the industry or becomes the start of broader relief. The hearing must conclude by July 15, so the timeline is tight.

Eighth, track state conformity. Some states conform to federal tax law, and some do not. Advisors need to determine how each state will treat this partial federal reclassification and plan accordingly.

Ninth, assess litigation risk. The legal authority the DOJ relied on has not been tested in this context. If a court enjoins the reclassification, clients who restructured or changed their tax positions in reliance on it could face exposure. Build that contingency into your planning.

Final thoughts

The April 23 order is the most significant federal action on marijuana classification in decades. It delivers meaningful tax relief to part of the medical cannabis industry and signals a more serious federal effort to align policy with the reality of state medical programs.

But it is still only a partial step. Recreational cannabis remains in Schedule I. Section 280E still applies to adult-use operators, banking reform has not arrived, and the broader hearing process has not yet played out. The legal foundation of the order itself may face challenges.

For tax and legal advisors, this is not a time to wait. The split between medical and recreational marijuana creates immediate compliance issues, planning opportunities and documentation demands. The rules have changed for part of the industry. Whether they change for the rest may depend on what happens on June 29.