Federal Cannabis Rescheduling

The cannabis industry has waited many years for rescheduling of cannabis, and the news hit Thursday, April 23, 2026, that official action has finally come to pass. Much is still unclear as to practical application, especially for cultivation and production businesses and dispensaries with mixed medical and adult use sales. We are actively monitoring developments, will be on the leading edge of accounting and tax impacts, and will keep you informed.

What We Know and What Remains Unclear

Earlier today, the U.S. Department of Justice (DOJ) and Drug Enforcement Administration announced a significant change in federal cannabis policy: state licensed medical marijuana and FDA-approved products containing marijuana have been moved from Schedule I to Schedule III under the Controlled Substances Act.

However, the change is targeted and limited, and many operational and tax questions remain unresolved, particularly for businesses with mixed medical and adult use activity. Below is a summary of what is clear today and where uncertainty remains.

What Is Known (As of April 23, 2026)

1. Medical Marijuana Is Now Schedule III — Recreational Cannabis Is Not
The DOJ’s final order applies only to:

• Marijuana products sold under a qualifying state medical marijuana license, and

• FDA approved drug products containing marijuana.

Adult use and recreational cannabis remains a Schedule I substance under federal law.

2. IRC §280E No Longer Applies to State Licensed Medical Cannabis
Because Schedule III substances are exempt from IRC §280E:

• State licensed medical cannabis operators may now deduct ordinary and necessary business expenses for federal income tax purposes.

This relief does not apply to recreational cannabis.

3. Change Is Effective Immediately – but, as written now, is not retroactive
The DOJ order is effective immediately (April 22–23, 2026, depending on source), without a traditional notice and comment rulemaking process, because it was issued under the Attorney General’s treaty authority.

This expedited approach achieved rescheduling quickly but contributes to the current lack of clarity.

4. A Federal Hearing on Broader Rescheduling Is Scheduled
The DEA will conduct an administrative hearing beginning June 29, 2026, to consider whether marijuana as a whole, including non medical use, should also be moved to Schedule III.

Key Uncertainties and Risk Areas

1. Mixed Medical and Adult Use Businesses
Many cannabis businesses operate:

• Dual licensed dispensaries, or

• Vertically integrated structures with both medical and recreational sales.

Unresolved questions include:

• How expenses should be allocated between medical (Schedule III) and recreational (Schedule I) activity.

• Whether separate legal entities will be required to clearly support §280E relief for the medical component of combined operations.

• How the IRS will view shared overhead, payroll, facilities, and management services.

No IRS guidance has yet been issued and may not arrive for an extended period of time.

2. Wholesale Cultivators and Producers
For businesses that:

• Sell cannabis at wholesale, and

• Do not control or may not know the end use (medical vs. recreational), it is currently unclear:

  • Whether §280E relief depends on the producer’s license status, the buyer’s license, or the ultimate retail use.

  • How “medical marijuana” will be defined when product streams are commingled.
    

3. Definition of “Qualifying State Medical License”
The DOJ order relies heavily on the existence of a state medical marijuana license, but:

• Licensing structures vary widely by state.

• Some states embed medical activity within broader cannabis licenses.

Clear federal definitions and IRS alignment do not yet exist.

4. Historic Returns and Amended Filings
The DOJ order is not retroactive:

• Prior years remain subject to the law as it existed during those periods.

• As presently written, medical cannabis will receive §280E relief effective now, not for the entirety of 2026.

• It is unclear whether future IRS guidance might allow limited amended return relief or accounting method changes.

What You Should Do Now

• Do not change tax positions yet without analysis
  §280E relief may be available, but only for clearly qualifying activity.

• Document licensing status carefully
  Maintain copies of medical licenses, renewals, and scope of permitted activity.

• Evaluate entity and operational structure
  Segregation of medical vs. recreational activity may become critical.

• Expect additional guidance
  IRS, Treasury, and DEA clarification is likely, but timing is uncertain.

• Stay in touch with your MH contact
  We are actively monitoring developments and will provide more targeted planning guidance as regulatory and tax authorities respond.

This memo reflects information available as of the date above and is subject to change as additional guidance is issued.