Lawmakers Press IRS for Medical Cannabis Tax Rules After Rescheduling

Congressional Letter Targets Tax Code Ambiguity

The May 28 letter asks the IRS to issue guidance within 90 days addressing how medical cannabis businesses will transition out of Section 280E restrictions and whether patient purchases qualify as deductible medical expenses under Section 213(d). Representative Earl Blumenauer (D-OR) and Senator Ron Wyden (D-OR) led the effort, joined by eight additional lawmakers from both chambers. The DEA's final rule rescheduling cannabis to Schedule III takes effect July 1, 2026. That leaves fewer than six weeks for operators and taxpayers to prepare.

Section 280E of the Internal Revenue Code currently prohibits businesses trafficking in Schedule I or Schedule II controlled substances from deducting ordinary business expenses. Cannabis operators have faced effective tax rates exceeding 70 percent under this provision. The DEA's move to Schedule III removes cannabis from the list of substances subject to 280E, but the IRS hasn't yet published formal guidance on transition mechanics, retroactive application, or state-licensed medical program treatment.

State-licensed operators face confusion about the effective date of 280E relief—whether it applies to the tax year in which the final rule publishes, the date the rule takes effect, or the first full tax year following implementation. The letter also requests clarification on whether businesses operating under state medical cannabis laws will be treated differently from adult-use operators for tax purposes, given that Schedule III substances are legal only for medical use under federal law.

Medical Expense Deduction Question Raised for First Time

The letter breaks new ground by asking whether patients purchasing medical cannabis from state-licensed dispensaries may deduct those costs as medical expenses under Section 213(d) of the tax code. Section 213(d) permits taxpayers to deduct expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, subject to a threshold of 7.5 percent of adjusted gross income. If cannabis is reclassified as a Schedule III substance—placing it in the same category as codeine and anabolic steroids—the lawmakers argue that patients with qualifying conditions should be able to claim the deduction if they obtain cannabis through a state-licensed medical program.

The IRS has never issued guidance on cannabis-related medical expense deductions. Prior agency positions have held that expenditures for substances illegal under federal law aren't deductible, even if state-legal. The lawmakers' letter contends that the rescheduling eliminates the federal illegality barrier and that the IRS should treat state-licensed medical cannabis purchases the same as other Schedule III prescription medications. Adult-use purchases remain outside the scope of federal medical frameworks, and the letter doesn't address them.

Tax practitioners have noted that even if the IRS permits the deduction, most patients won't benefit. The 7.5 percent AGI threshold excludes lower-income filers. Many states don't conform to federal medical expense deduction rules. Still, IRS recognition of medical cannabis as a deductible expense would mark a significant shift in federal tax policy, both symbolically and as precedent.

Timeline Pressure Mounts as Effective Date Approaches

The July 1, 2026, effective date leaves state-licensed operators fewer than 35 days to adjust accounting systems, amend estimated tax payments, and consult with auditors on the impact of 280E relief. The lawmakers' 90-day guidance request would push the IRS response into late August, well after the effective date. Industry groups have called for interim guidance or a safe-harbor provision allowing operators to claim deductions retroactively once formal guidance is issued.

The IRS has historically taken months or years to issue guidance on novel tax questions. When the Controlled Substances Act was amended in 2018 to exempt hemp, the agency issued no advance guidance, leaving operators to rely on private letter rulings and informal IRS statements. The lawmakers' letter emphasizes that the scale of the cannabis industry—estimated at $35 billion in annual sales across state-licensed markets—and the complexity of 280E transition issues warrant prioritized rulemaking.

The letter also requests that the IRS address whether businesses may amend prior-year returns to claim refunds for tax years in which they were subject to 280E but wouldn't have been under Schedule III classification. This question is particularly acute for businesses that filed returns for tax year 2025 before the DEA's final rule was published in April 2026. The lawmakers suggest that the IRS establish a claims process similar to those used for other retroactive tax law changes.

State-Federal Tax Conformity Complications Loom

At least 18 states have decoupled from federal tax treatment of cannabis businesses in anticipation of 280E relief, and those state revenue agencies now face their own conformity questions. States including California, Colorado, and Massachusetts enacted statutes in recent years that impose separate state-level versions of 280E or that add back federal deductions to prevent revenue loss if 280E is lifted. The lawmakers' letter doesn't address state conformity issues directly, but tax policy analysts have warned that divergent state and federal treatment will create compliance burdens for multi-state operators.

The letter was sent to IRS Commissioner Daniel Werfel and Treasury Secretary Janet Yellen. Neither agency had responded publicly as of May 28. The IRS typically doesn't comment on pending guidance requests. The lawmakers have requested a briefing from IRS and Treasury staff by June 15, 2026, to discuss the agency's timeline and policy approach. For full background on this story, see the CannIntel topic hub on DEA rescheduling tax implications.