DOJ Finalizes Schedule III Reclassification for Medical Marijuana

Final Order Ends Five-Decade Schedule I Classification

The DOJ's final rule removes marijuana from Schedule I—the category reserved for drugs with no accepted medical use and high abuse potential—and places it in Schedule III alongside ketamine and anabolic steroids. The reclassification follows a multi-year administrative review initiated by President Biden's October 2022 directive to the Department of Health and Human Services and the Attorney General.

The order doesn't legalize marijuana under federal law. Cannabis remains a controlled substance. Cultivation, distribution, and possession outside state-authorized medical programs continue to violate the CSA, and federal criminal penalties for unauthorized trafficking remain in force.

The DEA's final rule incorporates the HHS recommendation submitted in August 2023, which concluded that marijuana has accepted medical use in treatment and a lower abuse potential than Schedule I or II substances. During the notice-and-comment period that closed in July 2024, the agency received more than 43,000 public comments.

280E Tax Relief Opens for State-Licensed Operators

Schedule III classification allows state-licensed cannabis businesses to deduct ordinary business expenses under Section 280E of the Internal Revenue Code, a change that could reduce effective tax rates for multi-state operators by 40 to 70 percentage points. Section 280E prohibits deductions for businesses trafficking in Schedule I or II controlled substances.

The shift creates immediate accounting and tax-planning questions:

• Effective date for expense deductions—whether businesses may amend prior-year returns or claim relief only for tax years beginning after August 1, 2026
• Treatment of inventory capitalization rules and cost-of-goods-sold calculations
• State tax conformity, as many states tie corporate income tax to federal taxable income
• IRS guidance on transition rules for businesses with fiscal years spanning the effective date

The Treasury Department hasn't yet issued implementing guidance. Industry groups estimate the tax change will generate $2 billion to $5 billion in annual deductions for licensed operators.

Employer Drug-Testing Programs Face Compliance Overhaul

The reclassification doesn't alter employers' rights to maintain drug-free workplace policies or to discipline employees for marijuana use, but it complicates compliance with federal contractor rules and safety-sensitive position standards. Employers subject to the Drug-Free Workplace Act of 1988 must prohibit Schedule I and II substances but have discretion over Schedule III drugs.

Key employer considerations include:

• Department of Transportation regulations continue to prohibit marijuana use for safety-sensitive positions, regardless of scheduling
• Federal contractors covered by the Drug-Free Workplace Act must review policies to determine whether marijuana remains a prohibited substance under contract terms
• State medical marijuana laws in 38 jurisdictions include varying levels of employment protection, creating a patchwork of compliance obligations
• Americans with Disabilities Act implications for employees using medical marijuana as a reasonable accommodation

The order doesn't preempt state laws that prohibit employment discrimination against medical marijuana patients. Employers operating in multiple states face conflicting obligations where state law protects off-duty use but federal contracts or safety regulations require zero-tolerance policies.

Banking and Research Access Expand Under New Classification

Schedule III status provides a clearer path for banks to serve state-licensed cannabis businesses without triggering Bank Secrecy Act violations, though the SAFE Banking Act's explicit safe harbor remains stalled in Congress. Financial institutions have filed more than 3 million suspicious activity reports related to marijuana businesses since 2014 under FinCEN's 2014 guidance.

Reclassification also eases research barriers. Scientists conducting FDA-approved studies on Schedule III substances face fewer DEA registration requirements and security protocols than Schedule I research, which requires a separate registration, on-site inspections, and vault storage. The National Institute on Drug Abuse has maintained a monopoly on federally legal cannabis cultivation for research purposes since 1968, but Schedule III classification allows additional licensed growers to supply clinical trials.

For comprehensive background on the rescheduling process, including the HHS recommendation and public comment period, see the CannIntel topic hub on DEA rescheduling.