Marijuana rescheduling and cannabis tax planning

In December 2025, President Trump signed an executive order directing the Department of Justice (DOJ) to expedite the process of rescheduling marijuana from Schedule I to Schedule III under the Controlled Substances Act. Moving marijuana from Schedule I to Schedule III would reclassify it as a drug with accepted medical use under federal law, but would not legalize recreational marijuana at the federal level. For tax purposes, this move would effectively end the §280E deduction and credit disallowance for the cannabis industry. 

Section 280E broadly disallows deductions and credits for businesses trafficking in Schedule I or II controlled substances, leaving most marijuana businesses able to recover expenses only through the cost of goods sold (COGS), which reduces gross income.

The executive order itself does not change the currently standing law of cannabis as a Schedule I drug. It starts, or more accurately accelerates, the formal federal rulemaking process of changing that status. Any eventual §280E tax relief would presumably apply prospectively only, once the DOJ and Drug Enforcement Administration (DEA) complete the rescheduling process and a final rule takes effect.

Why marijuana rescheduling matters for tax planning

Section 280E is the defining federal tax issue for marijuana businesses. Because marijuana remains a Schedule I controlled substance today, businesses involved in its sale cannot deduct most ordinary and necessary expenses, including rent, wages, utilities and marketing costs, nor take advantage of general business credits available to most other industries, such as the research credit for qualifying activities. In many cases, this pushes effective tax rates to unsustainable levels, particularly for small operators.

Once marijuana is rescheduled to Schedule III and the change is effective, §280E would no longer apply to businesses trafficking only in marijuana, regardless of whether the product is sold for medical or recreational use under state law. These organizations could then deduct ordinary and necessary business expenses under §162, dramatically changing taxable income, cash flow and long-term viability.

Consider a small cannabis retailer that has been paying tax on gross profit rather than net income because of §280E. If rescheduling becomes effective, that same business could deduct payroll and occupancy costs going forward, significantly lowering taxable income and freeing up cash for operations and compliance purposes. This shift demonstrates why rescheduling is viewed as one of the most consequential federal cannabis tax developments in decades.

How quickly could rescheduling actually happen?

Even on an accelerated track, marijuana rescheduling will not be done immediately. Under the Controlled Substances Act, rescheduling requires notice-and-comment rulemaking, agency review and a final published rule with an effective date.

In many cases, this process takes 12 to 24 months. Marijuana may move faster than usual because medical and scientific reviews are already underway and the executive order signals political urgency. Still, tax professionals should think in terms of months to years, not weeks.

The safest planning assumption is no change for the current tax year unless a final rule is issued and becomes effective during the year. Relief from §280E, if it comes, will likely not be retroactive.

What about those hemp changes we just heard about?

Recall that in November 2025, Congress narrowed the federal definition of hemp and tightened limits on intoxicating hemp-derived products (such as Delta-8 and THCA). How does this tie into the executive order expediting the rescheduling of marijuana?

For background, marijuana and hemp are derived from the same (cannabis) plant, but are defined differently by federal law:

Hemp is cannabis that contains 0.3% or less THC by dry weight; it was federally legalized by the “2018 Farm Bill” (H.R.2 - Agriculture Improvement Act of 2018). 

Marijuana contains more than 0.3% THC and remains regulated under the Controlled Substances Act.

Under the new hemp rules, businesses generally have until Nov. 12, 2026, unless legal challenges are successful, to take one of three paths.

1. They can reformulate products so they continue to meet the federal hemp definition. 
2. They can discontinue affected product lines altogether. 
3. If they want to continue selling intoxicating products, they must do so through state-licensed cannabis programs by obtaining the appropriate licenses, or selling through licensed cannabis operators and complying with cannabis-specific regulatory requirements.

Products that no longer qualify as hemp do not automatically become subject to §280E. Instead, §280E exposure depends on whether the activity is treated as lawful under applicable federal and state cannabis frameworks, or as illegal trafficking in a Schedule I or II controlled substance.

Here is where the connection to marijuana rescheduling matters. As certain intoxicating products are pushed out of the hemp bracket and into the marijuana market, the executive order signals potential §280E relief for businesses operating within regulated cannabis systems, once rescheduling is finalized and takes effect.

Running the marijuana marathon – what to watch for next

Over the coming months, tax professionals should focus on timing, not headlines.

First, follow along as NATP monitors the marijuana rescheduling process. Any relief from §280E depends on completed DOJ and DEA rulemaking and a final effective date. Until then, current law applies and planning should assume no retroactive relief.

Second, keep the hemp transition deadline in view. Hemp businesses have one year from enactment (Nov. 12, 2025) to adjust product lines or exit certain markets, which will drive inventory and compliance decisions ahead of rescheduling. 

Third, revisit business structure and cost allocations. Clients with both hemp and cannabis activities may need clearer separation as federal definitions tighten and state cannabis systems become the primary regulatory pathway for intoxicating products.

Finally, watch state responses, which may move on different timelines and affect licensing, tax treatment and compliance obligations.

Canna-business as usual… for now?

Federal cannabis tax rules may be headed for change, but not just yet. Marijuana rescheduling could eventually remove §280E restrictions and lower federal income tax burdens for regulated cannabis businesses, but any relief depends on completed rulemaking and a final effective date. At the same time, hemp businesses are operating under a tighter definition and a fixed transition window, with most near-term risk tied to product compliance rather than eventual tax treatment.

For tax professionals, the work now is managing expectations, tracking timelines and helping clients plan through change without assuming outcomes. NATP will continue to monitor developments and provide practical guidance as these rules evolve.

For a deeper dive on the effects of §280E on marijuana businesses, enroll now in NATP’s The Ins and Outs of Cannabis Taxation On-Demand Webinar.