DEA Rescheduling and 280E Tax Relief: What Cannabis Businesses Need to Know

Executive Summary

The Drug Enforcement Administration's proposed rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act represents the most significant federal cannabis policy shift in over 50 years, with immediate implications for Internal Revenue Code Section 280E tax treatment. Currently, cannabis businesses operating in state-legal markets face effective tax rates exceeding 70% because 280E prohibits deductions for businesses trafficking in Schedule I or II controlled substances. Rescheduling to Schedule III would eliminate this prohibition, allowing standard business expense deductions for cost of goods sold, payroll, rent, marketing, and other ordinary expenses. The change affects approximately 15,000 licensed cannabis operators across 38 states with medical or adult-use programs, representing a combined market exceeding $30 billion annually. For Arkansas specifically, where medical cannabis generated $350 million in sales during 2025, operators could see tax burdens reduced by 40-50%, freeing capital for expansion, employee wages, and price reductions that benefit patients. The rescheduling process, initiated by President Biden's directive in October 2022 and formalized through a Department of Justice Notice of Proposed Rulemaking in May 2024, remains subject to administrative review and potential legal challenges, with final implementation anticipated no earlier than late 2026.

Why This Matters: Stakeholders, Scale, and Economic Impact

The intersection of DEA rescheduling and 280E tax relief affects every participant in the legal cannabis supply chain, from cultivators and processors to dispensaries and ancillary service providers. For cannabis operators, Section 280E represents the single largest operational cost burden beyond product itself. A typical dispensary with $5 million in annual revenue and $3 million in cost of goods sold currently pays federal taxes on the full $5 million gross revenue, minus only direct product costs. Rent, salaries, utilities, insurance, and marketing—totaling perhaps $1.5 million—cannot be deducted. The effective federal tax rate reaches 70-80% of actual profit. Rescheduling to Schedule III would restore normal tax treatment, reducing federal liability by an estimated $600,000-$900,000 annually for a mid-sized operator. For multi-state operators (MSOs) like Curaleaf, Trulieve, Green Thumb Industries, and Cresco Labs, the aggregate impact measures in hundreds of millions of dollars. Curaleaf reported $1.3 billion in revenue for fiscal 2025; industry analysts estimate 280E added approximately $180-$220 million to the company's federal tax burden. Eliminating this penalty would flow directly to EBITDA, improving access to capital markets and enabling reinvestment in infrastructure, research, and market expansion. For patients and consumers, tax relief creates downward pressure on retail prices. Operators currently build 280E costs into pricing models. A 2025 analysis by the Marijuana Policy Project estimated that full 280E relief could reduce consumer prices by 15-20% within 18 months of implementation, improving access for medical patients in states like Arkansas, where a month's supply of cannabis medicine costs $300-$450. For state governments, the calculus is complex. Lower federal tax burdens improve operator profitability and sustainability, reducing business failures and stabilizing state tax revenue. However, some states with gross receipts taxes or revenue-based licensing fees may see modest revenue declines if operators reduce prices. Arkansas collected $38 million in medical cannabis taxes during 2025; state officials project stable or slightly increased collections post-280E relief due to market expansion offsetting per-unit price decreases. For investors and lenders, 280E relief fundamentally alters cannabis business valuations. Institutional investors have historically applied significant risk discounts to cannabis equities due to federal illegality and punitive taxation. Rescheduling to Schedule III, while maintaining cannabis as a controlled substance, provides a clearer regulatory pathway and normalizes financial metrics. Equity analysts at Cowen project that 280E elimination could increase average MSO valuations by 25-35% within the first year.

Background and History: From Prohibition to Rescheduling

The current federal cannabis scheduling regime traces to the Controlled Substances Act of 1970, which established five schedules based on medical utility, abuse potential, and safety.

The Controlled Substances Act and Initial Scheduling (1970-1972)

Congress enacted the Controlled Substances Act as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, consolidating previous federal drug laws into a unified framework. The Act established 21 U.S.C. § 812, which created five schedules. Schedule I substances are defined as having high abuse potential, no currently accepted medical use in treatment in the United States, and lack of accepted safety for use under medical supervision. Schedule III substances have lower abuse potential than Schedule I or II, currently accepted medical use, and moderate or low physical dependence potential. Cannabis was temporarily placed in Schedule I pending completion of a comprehensive study by the National Commission on Marihuana and Drug Abuse, appointed by President Nixon. The Commission's 1972 report, "Marihuana: A Signal of Misunderstanding," recommended decriminalization of possession for personal use. Nixon rejected the recommendation, and cannabis remained in Schedule I, where it has stayed for 54 years despite evolving state laws and scientific evidence.

Section 280E: The Tax Code as Drug War Weapon (1982)

Internal Revenue Code Section 280E emerged from a 1981 Tax Court case, Edmondson v. Commissioner, in which Jeffrey Edmondson, a Minneapolis cocaine, marijuana, and methamphetamine trafficker, successfully deducted business expenses including packaging, phone bills, and vehicle costs. Congress responded with 280E, enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982. The statute reads: "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted." The provision targeted illegal drug traffickers. Congress did not anticipate state-legal cannabis markets; California's Proposition 215, legalizing medical cannabis, did not pass until 1996, fourteen years after 280E's enactment.

State-Legal Cannabis Meets Federal Tax Code (1996-2015)

California's Compassionate Use Act of 1996 created the first legal medical cannabis market, followed by Oregon, Washington, and Alaska in 1998. Early dispensaries operated as nonprofits or cooperatives, often unaware of 280E implications. The Internal Revenue Service began aggressive 280E enforcement around 2007-2008. The landmark case Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner (CHAMP), decided by the Tax Court in 2007, established that 280E applies to state-legal cannabis businesses. CHAMP, a San Francisco Bay Area dispensary, argued it provided caregiving services, not drug trafficking. The Tax Court ruled that because cannabis remained a Schedule I controlled substance under federal law, 280E applied regardless of state legality. The decision allowed deduction of cost of goods sold under 21 U.S.C. § 471 (inventory accounting rules) but disallowed all other business expenses. Olive v. Commissioner (2012) and Canna Care, Inc. v. Commissioner (2015) reinforced CHAMP's holding, establishing that cannabis businesses could deduct only direct costs of acquiring or producing cannabis inventory—seeds, plants, growing supplies, direct labor—but not rent, utilities (except those directly allocable to production), administrative salaries, marketing, or professional fees.

The Cole Memo and State Expansion (2013-2018)

Deputy Attorney General James Cole issued guidance in August 2013 directing federal prosecutors to deprioritize enforcement against state-legal cannabis businesses complying with robust regulatory frameworks. The Cole Memo did not change 280E applicability but created operational space for the industry to grow. Colorado and Washington launched adult-use sales in January 2014, followed by Oregon, Alaska, and eventually 24 states. Attorney General Jeff Sessions rescinded the Cole Memo in January 2018, creating renewed uncertainty, but 280E remained the primary federal enforcement mechanism affecting compliant operators.

Biden's Rescheduling Directive (October 2022)

On October 6, 2022, President Biden issued a presidential memorandum directing Secretary of Health and Human Services Xavier Becerra and Attorney General Merrick Garland to "expeditiously" review cannabis scheduling under the Controlled Substances Act. The directive followed decades of advocacy by organizations including the National Organization for the Reform of Marijuana Laws, the Drug Policy Alliance, and the U.S. Cannabis Council. The Department of Health and Human Services, through the Food and Drug Administration, conducted a comprehensive scientific review examining cannabis's abuse potential, medical utility, and safety profile. The FDA's analysis included review of state medical cannabis programs, clinical trials of Epidiolex (a CBD-based seizure medication approved in 2018), and international scheduling under the United Nations Single Convention on Narcotic Drugs.

HHS Recommendation and DOJ Proposed Rule (August 2023-May 2024)

In August 2023, HHS delivered its recommendation to the DEA: reschedule cannabis to Schedule III. The recommendation, portions of which were later disclosed through Freedom of Information Act requests, concluded that cannabis has accepted medical use in treatment in the United States (evidenced by 38 state medical programs and FDA-approved cannabinoid medications), lower abuse potential than Schedule I or II substances like heroin or cocaine, and moderate to low dependence potential comparable to anabolic steroids and ketamine (both Schedule III). The DEA published a Notice of Proposed Rulemaking in the Federal Register on May 21, 2024, formally proposing to reschedule cannabis and cannabis-derived substances from Schedule I to Schedule III. The NPRM opened a public comment period, ultimately extended to September 2024, receiving over 43,000 submissions from patients, operators, medical professionals, law enforcement, and advocacy organizations.

Administrative Law Judge Hearings (2025-2026)

Following the comment period, multiple parties—including the Cannabis Industry Association, Smart Approaches to Marijuana, and several state attorneys general—requested formal hearings before a DEA Administrative Law Judge. The DEA granted hearing requests in December 2024, scheduling proceedings for spring and summer 2025. ALJ hearings concluded in September 2025. The administrative record includes testimony from pharmacologists, economists, state regulators, and patient advocates. The ALJ's recommended decision, submitted to the DEA Administrator in November 2025, supported rescheduling to Schedule III, finding that HHS's scientific determination was entitled to substantial deference and that the evidence supported cannabis's medical utility and lower abuse potential relative to Schedule I or II. As of May 2026, the DEA Administrator has not issued a final rule. Agency sources indicate final action is expected by Q4 2026, with an effective date 60-90 days following publication.

Key Players: Agencies, Advocates, and Opposition

Drug Enforcement Administration

The DEA, an agency within the Department of Justice, holds statutory authority to schedule controlled substances under 21 U.S.C. § 811. The agency must consider eight factors: actual or relative potential for abuse; scientific evidence of pharmacological effect; current scientific knowledge; history and current pattern of abuse; scope, duration, and significance of abuse; risk to public health; psychic or physiological dependence liability; and whether the substance is an immediate precursor of a controlled substance. While the DEA must request a scientific and medical evaluation from HHS, the agency retains final scheduling authority. DEA Administrator Anne Milgram, appointed in 2021, has indicated the agency will follow the administrative process to completion but has not publicly previewed the final decision.

Department of Health and Human Services and FDA

HHS, through the FDA, conducts the scientific and medical evaluation required by the Controlled Substances Act. FDA's Center for Drug Evaluation and Research led the 2022-2023 cannabis review, analyzing data from state programs, clinical research, adverse event reports, and international sources. The agency's recommendation to reschedule to Schedule III represents the most significant federal acknowledgment of cannabis's medical utility since the Controlled Substances Act's enactment.

Internal Revenue Service

The IRS enforces Section 280E through audits and Tax Court litigation. The agency has issued limited guidance on 280E's application to cannabis businesses, primarily through Chief Counsel Advice memoranda. IRS officials have stated publicly that the agency will apply 280E as written: if cannabis moves to Schedule III, the statute's plain language excludes Schedule III substances, and 280E will no longer apply. The IRS has not issued advance guidance on transition procedures or effective dates, creating uncertainty about whether relief applies retroactively or only prospectively from the final rule's effective date.

Multi-State Operators and Industry Associations

The U.S. Cannabis Council, representing MSOs including Curaleaf, Trulieve, Green Thumb Industries, and Cresco Labs, has advocated for rescheduling and 280E relief since its formation in 2020. The organization submitted detailed comments during the NPRM process and provided expert testimony during ALJ hearings. State-level associations, including the California Cannabis Industry Association, the Massachusetts Cannabis Control Commission, and the Arkansas Medical Marijuana Association, have similarly supported rescheduling while emphasizing the need for clear IRS guidance on implementation.

Patient and Reform Advocacy Organizations

The National Organization for the Reform of Marijuana Laws, founded in 1970, has pursued cannabis rescheduling through administrative petitions, litigation, and congressional advocacy for over 50 years. Americans for Safe Access, focused specifically on medical cannabis patient rights, has documented cases of patients losing access due to dispensary closures driven by 280E tax burdens. The Drug Policy Alliance has emphasized racial justice dimensions, noting that 280E disproportionately affects social equity licensees who enter the market with limited capital reserves.

Opposition: Smart Approaches to Marijuana

Smart Approaches to Marijuana, founded by former Representative Patrick Kennedy and physician Kevin Sabet, opposes rescheduling, arguing that cannabis meets Schedule I criteria due to abuse potential and public health risks. The organization submitted comments opposing the NPRM and participated in ALJ hearings, presenting testimony from physicians and researchers emphasizing cannabis use disorder prevalence and potential harms to adolescent brain development. SAM advocates for maintaining Schedule I status while pursuing FDA-approved cannabinoid medications through traditional drug development pathways.

Legal and Regulatory Framework

The rescheduling process operates under the Administrative Procedure Act, requiring notice, public comment, and reasoned decision-making based on the administrative record. The Controlled Substances Act delegates scheduling authority to the Attorney General, who has redelegated it to the DEA Administrator. Under 21 U.S.C. § 811(b), the DEA must request a scientific and medical evaluation from HHS before initiating rescheduling proceedings. HHS's evaluation binds the DEA on scientific and medical matters; the DEA cannot reschedule a substance if HHS finds it lacks medical utility or has high abuse potential relative to the proposed schedule. The Administrative Procedure Act, 5 U.S.C. § 553, governs the rulemaking process. The DEA must publish a Notice of Proposed Rulemaking in the Federal Register, provide a meaningful comment period (typically 60-90 days), consider all relevant comments, and issue a final rule with a reasoned explanation for its decision. Parties adversely affected by the final rule may petition for reconsideration or seek judicial review in federal court under 5 U.S.C. § 706. Section 280E's text is unambiguous: it applies to trafficking in Schedule I and Schedule II controlled substances. If cannabis moves to Schedule III, the statute no longer applies by its plain terms. No regulatory action by the IRS is required; the change is automatic upon the effective date of the DEA's final rule. However, the IRS will need to issue guidance on transition issues, including whether businesses may amend prior-year returns, how to handle pending audits and Tax Court cases, and whether relief applies to the full tax year in which rescheduling occurs or only to periods after the effective date. Cannabis will remain a controlled substance under Schedule III, meaning cultivation, distribution, and possession remain federal crimes absent specific authorization. The Rohrabacher-Farr Amendment (now the Joyce-Leahy Amendment), renewed annually in congressional appropriations bills, prohibits the Department of Justice from using federal funds to interfere with state medical cannabis programs. Adult-use programs lack similar protection, though DOJ has exercised prosecutorial discretion to avoid interference with state-compliant operators.

State-by-State Breakdown: Medical and Adult-Use Programs

As of May 2026, 38 states, four territories, and the District of Columbia have legalized medical cannabis, while 24 states and DC have legalized adult-use cannabis.

Arkansas

Arkansas voters approved medical cannabis through Amendment 98 to the state constitution in November 2016, with the program launching in May 2019. The Arkansas Medical Marijuana Commission oversees 38 licensed dispensaries and eight cultivation facilities. Qualifying conditions include cancer, glaucoma, HIV/AIDS, hepatitis C, ALS, Crohn's disease, ulcerative colitis, PTSD, severe arthritis, fibromyalgia, and Alzheimer's disease. Patients may possess up to 2.5 ounces per 14-day period. The program generated $350 million in sales during 2025, serving approximately 78,000 registered patients. Arkansas operators face effective tax rates of 65-75% under current 280E treatment; rescheduling to Schedule III would reduce federal tax burdens by an estimated $42-$55 million annually across the state's licensed operators, according to analysis by the Arkansas Medical Marijuana Association.

California

California legalized medical cannabis in 1996 (Proposition 215) and adult-use cannabis in 2016 (Proposition 64), with adult-use sales launching in January 2018. The state's cannabis market, the largest in the nation, generated $5.3 billion in legal sales during 2025. California imposes a 15% excise tax on retail sales plus local taxes that can reach 10% or more in some jurisdictions. The state licenses approximately 1,200 retailers, 800 cultivators, and 500 manufacturers. California operators have been particularly vocal about 280E's impact; the California Cannabis Industry Association estimates that 280E adds $800 million to $1.1 billion in federal tax burden annually across the state's licensed operators.

Colorado

Colorado voters approved adult-use cannabis through Amendment 64 in November 2012, with sales beginning January 1, 2014. The state's Marijuana Enforcement Division oversees approximately 500 retail stores and 1,000 cultivation facilities. Colorado's market generated $1.8 billion in sales during 2025. The state imposes a 15% excise tax on wholesale transfers and a 15% retail sales tax. Colorado operators have benefited from mature regulatory frameworks and established banking relationships, but 280E remains a significant burden. The Colorado Department of Revenue estimates that rescheduling would reduce federal tax burdens by approximately $180-$220 million annually for Colorado-licensed businesses.

Florida

Florida legalized medical cannabis through Amendment 2 in November 2016, creating one of the nation's largest medical markets with over 850,000 registered patients as of May 2026. The state's vertically integrated license structure limits licenses to approximately 25 Medical Marijuana Treatment Centers, each operating multiple dispensaries. Florida's program generated $2.1 billion in sales during 2025. Major operators including Trulieve (headquartered in Florida), Curaleaf, and Verano operate extensive Florida footprints. Florida voters will consider an adult-use legalization initiative in November 2026. The state's large operators face 280E burdens in the tens of millions of dollars annually; Trulieve alone estimates 280E added approximately $65-$80 million to its federal tax liability in fiscal 2025.

Illinois

Illinois launched adult-use sales on January 1, 2020, following passage of the Cannabis Regulation and Tax Act in 2019. The state's program emphasizes social equity, reserving licenses for applicants from communities disproportionately impacted by cannabis prohibition. Illinois' market generated $1.6 billion in sales during 2025. The state imposes a tiered tax structure: 10% on products with THC below 35%, 20% on products with THC above 35%, and 25% on concentrates. Illinois operators, particularly social equity licensees who entered the market with limited capital, have identified 280E as a primary barrier to profitability and sustainability.

Massachusetts

Massachusetts voters approved adult-use legalization in November 2016, with sales launching in November 2018. The Cannabis Control Commission oversees approximately 400 licensed retailers and 200 cultivation facilities. Massachusetts' market generated $1.4 billion in sales during 2025. The state imposes a 10.75% excise tax plus local taxes up to 3%. Massachusetts has pursued aggressive social equity initiatives, but 280E has undermined these efforts; a 2025 study by the Massachusetts Cannabis Control Commission found that social equity licensees face effective tax rates 12-15 percentage points higher than well-capitalized operators due to inability to absorb 280E burdens through economies of scale.

Michigan

Michigan voters approved adult-use cannabis in November 2018, with sales beginning in December 2019. The state's Marijuana Regulatory Agency oversees approximately 650 retail stores. Michigan's market generated $1.9 billion in sales during 2025, making it the third-largest state market after California and Florida. The state imposes a 10% excise tax on adult-use sales. Michigan's competitive licensing environment has driven rapid market growth but also significant business failures; industry observers attribute many closures to inability to sustain operations under 280E tax burdens combined with price compression from oversupply.

New York

New York legalized adult-use cannabis through the Marijuana Regulation and Taxation Act in March 2021, with retail sales beginning in December 2022. The state's rollout has been slower than anticipated due to regulatory delays and litigation. As of May 2026, approximately 150 licensed dispensaries operate statewide, with the Office of Cannabis Management projecting 500-600 licenses by end of 2026. New York's program prioritizes social equity and justice-involved applicants. Early operators report that 280E significantly impacts viability, particularly for undercapitalized social equity licensees.

Ohio

Ohio voters approved adult-use legalization in November 2023, with sales launching in August 2024. The state's Division of Cannabis Control oversees approximately 120 dispensaries (converted from medical-only licenses) and 40 cultivation facilities. Ohio's medical program, operational since 2019, serves approximately 140,000 registered patients. Combined medical and adult-use sales reached $1.1 billion during 2025. Ohio imposes a 10% adult-use excise tax. Ohio operators have actively lobbied for 280E relief, with the Ohio Cannabis Coalition submitting detailed comments during the DEA's NPRM process.

Pennsylvania

Pennsylvania operates a medical-only program, launched in 2018, serving approximately 450,000 registered patients as of May 2026. The state's vertically integrated license structure limits licenses to approximately 50 organizations operating multiple dispensary locations. Pennsylvania's medical market generated $1.3 billion in sales during 2025. Adult-use legalization efforts have stalled in the state legislature despite support from Governor Josh Shapiro. Pennsylvania operators face 280E burdens comparable to adult-use states; the Pennsylvania Cannabis Coalition estimates aggregate federal tax burden of $140-$170 million annually under current 280E treatment.

Market and Business Implications

Eliminating 280E would represent the single largest operational cost reduction in the history of the legal cannabis industry, fundamentally altering business models, valuations, and competitive dynamics. For multi-state operators, 280E relief would immediately improve EBITDA margins by 15-25 percentage points. Curaleaf, which reported $1.3 billion in revenue and $47 million in net income for fiscal 2025, could see net income increase by $180-$220 million annually. Trulieve, with $1.1 billion in revenue and $89 million in net income, could see increases of $65-$80 million. Green Thumb Industries and Cresco Labs would see similar impacts proportional to their revenue bases. This improved profitability would enhance access to capital markets, enabling debt refinancing at lower rates and potential uplisting to major exchanges like NASDAQ or NYSE, which currently prohibit companies violating federal law. For single-state operators and small businesses, 280E relief could mean the difference between viability and closure. A small dispensary with $2 million in annual revenue, $1.2 million in cost of goods sold, and $600,000 in operating expenses currently pays federal taxes on $800,000 of income (revenue minus COGS), despite actual profit of only $200,000. At a 21% corporate rate, federal tax liability is $168,000—84% of actual profit. Under normal tax treatment, the business would pay tax on $200,000 of actual profit, with federal liability of $42,000—a savings of $126,000, or 63% of net income. This relief enables reinvestment in inventory, staff, compliance, and marketing. For social equity licensees, who typically enter the market with limited capital and face higher costs of capital, 280E relief is existential. A 2025 study by the Minority Cannabis Business Association found that 280E was the primary or contributing factor in 60% of social equity business failures across six states surveyed. Eliminating 280E would level the playing field, allowing social equity operators to compete on operational efficiency rather than capital reserves. For ancillary businesses—software providers, testing laboratories, security firms, packaging companies—the impact is indirect but significant. Healthier, more profitable cannabis operators invest more in technology, compliance, and services. Industry analysts project that 280E relief could increase ancillary sector revenue by 20-30% within two years as operators redirect tax savings into operational improvements. For real estate investors and landlords, 280E relief reduces tenant default risk and improves lease economics. Cannabis tenants currently require higher margins to sustain operations; normalized taxation reduces this risk premium. Commercial real estate firms including Innovative Industrial Properties, the largest cannabis-focused REIT, have indicated that 280E relief would improve tenant credit quality and potentially reduce required cap rates. For consumers and patients, the price impact depends on competitive dynamics. In mature, competitive markets like Colorado, Oregon, and Michigan, operators will likely pass through a significant portion of tax savings as price reductions to maintain or gain market share. The Marijuana Policy Project estimates consumer price reductions of 15-20% in competitive markets within 18 months of 280E relief. In limited-license states like Pennsylvania, Illinois, and Florida, where supply constraints and vertical integration limit competition, operators may retain more of the tax savings as profit. Patient advocates emphasize that even partial pass-through would significantly improve access for low-income medical patients.

What Experts Say

Industry analysts, tax professionals, and policy experts broadly agree that 280E relief would transform cannabis business economics, though implementation details remain uncertain. Andrew Kline, a partner at Perkins Coie and former senior policy advisor at the National Cannabis Industry Association, said in congressional testimony in March 2025 that eliminating 280E "would be the single most impactful federal policy change for state-legal cannabis businesses short of full legalization." Kline emphasized that the relief would be automatic upon rescheduling to Schedule III, requiring no additional IRS rulemaking, though he noted that the IRS should issue guidance on transition issues including retroactive application and treatment of pending audits. Kris Krane, president of 4Front Ventures, a multi-state operator, told investors during a February 2026 earnings call that 280E relief could improve the company's EBITDA margin from approximately 18% to 30-32%, assuming no price compression. Krane noted that competitive dynamics would likely force some pass-through to consumers but that even partial retention of savings would "fundamentally improve our ability to invest in growth, pay down debt, and return value to shareholders." Rachel Gillette, executive director of the Colorado Cannabis Industry Association, said in an April 2026 interview with Marijuana Business Daily that Colorado operators are preparing for 280E relief by analyzing which expense categories offer the highest return on investment once deductible. Gillette noted that many operators plan to increase spending on marketing, employee training, and compliance technology—areas currently underfunded due to 280E constraints. Pat Oglesby, a former tax counsel to the Senate Finance Committee and founder of the Center for New Revenue, has written extensively on 280E implementation issues. According to Oglesby's analysis published in Tax Notes in January 2026, the IRS faces several unresolved questions: whether businesses may amend returns for open tax years (generally three years), how to handle pending Tax Court cases where 280E is at issue, and whether relief applies to the full tax year in which rescheduling occurs or only to post-effective-date periods. Oglesby recommends that the IRS issue advance guidance at least 60 days before the DEA's final rule effective date to provide certainty for tax planning. Smart Approaches to Marijuana has argued that rescheduling to Schedule III is inappropriate regardless of tax implications. Kevin Sabet, the organization's president, said in testimony before the DEA Administrative Law Judge in June 2025 that cannabis meets Schedule I criteria due to abuse potential and lack of FDA-approved applications beyond Epidiolex. Sabet contended that state medical programs do not constitute "accepted medical use" under the Controlled Substances Act's definition, which requires adequate and well-controlled studies demonstrating efficacy and safety. The ALJ's recommended decision rejected this argument, finding that HHS's determination of medical utility was entitled to substantial deference and that state programs, while not meeting FDA approval standards, demonstrate accepted medical use within the meaning of the statute.

What's Next: Timeline and Decision Points

The DEA is expected to issue a final rule on cannabis rescheduling by Q4 2026, with an effective date 60-90 days following publication in the Federal Register. The administrative record closed with the ALJ's recommended decision in November 2025. The DEA Administrator must now review the record and issue a final rule. Agency sources indicate that the Administrator's office is conducting final legal and policy review, including coordination with the Department of Justice's Office of Legal Counsel and the White House Office of Management and Budget. The final rule will include a detailed response to public comments, explanation of the agency's reasoning, and findings addressing each of the eight factors under 21 U.S.C. § 811(c). If the DEA issues a final rule rescheduling cannabis to Schedule III, the rule will become effective 60-90 days after publication in the Federal Register, as required by the Administrative Procedure Act. The effective date triggers automatic 280E relief; no further IRS action is required for the statute to cease applying to cannabis businesses. However, legal challenges are likely. Smart Approaches to Marijuana and potentially state attorneys general from states without legal cannabis programs may petition for reconsideration or file suit in federal court challenging the rule under the Administrative Procedure Act. Plaintiffs would need to demonstrate that the DEA's decision was arbitrary, capricious, an abuse of discretion, or not in accordance with law. Given the extensive administrative record, HHS's scientific determination, and the ALJ's recommended decision, such challenges face significant hurdles. Courts generally defer to agency expertise on scientific and technical matters. If the DEA declines to reschedule cannabis, maintaining Schedule I status, the decision would also be subject to judicial review. Advocacy organizations including NORML and Americans for Safe Access have indicated they would immediately file suit challenging a decision to maintain Schedule I as arbitrary and capricious given HHS's recommendation and the administrative record. The IRS has not yet issued guidance on 280E implementation. Industry groups including the U.S. Cannabis Council and the American Institute of CPAs have urged the agency to publish advance guidance addressing: (1) whether businesses may amend returns for open tax years to claim refunds; (2) how to handle pending audits and Tax Court litigation; (3) whether relief applies to the full tax year in which rescheduling occurs or only to post-effective-date periods; and (4) transition procedures for businesses with fiscal years that span the effective date. The IRS typically issues such guidance through revenue procedures or notices published in the Internal Revenue Bulletin. State legislatures and regulatory agencies are also preparing for potential rescheduling. Some states with gross receipts taxes or revenue-based licensing fees are analyzing whether to adjust tax structures to maintain revenue neutrality if federal tax relief leads to lower retail prices. Other states are considering whether to expand medical qualifying conditions or increase possession limits in light of federal acknowledgment of cannabis's medical utility and lower abuse potential. Congressional action remains possible but unlikely in the near term. Senator Cory Booker and Representative Nancy Mace have introduced legislation that would deschedule cannabis entirely, removing it from the Controlled Substances Act and providing explicit 280E relief. The Cannabis Administration and Opportunity Act has not advanced beyond committee hearings. More modest legislation, such as the SAFE Banking Act (providing access to financial services) or the HOPE Act (expunging federal cannabis convictions), has bipartisan support but has not reached floor votes in both chambers.

Further Reading: Primary Sources and Analysis

• Drug Enforcement Administration, Notice of Proposed Rulemaking: Schedules of Controlled