Marijuana Rescheduling and IRC 280E: What Cannabis Operators Need to Know

On December 18, 2025, President Trump signed an executive order. It directed the Department of Justice to expedite rescheduling marijuana from Schedule I to Schedule III under the Controlled Substances Act (CSA). This action does not legalize cannabis at the federal level, but it could be transformative for state-legal operators, especially regarding Internal Revenue Code Section 280E.

Why Rescheduling Matters for 280E

IRC 280E disallows ordinary and necessary business deductions for any business trafficking in a Schedule I or II controlled substance. Because marijuana has historically been Schedule I, state-legal cannabis companies pay punitive federal taxes. They are often taxed on gross profit, not net income.

If and when marijuana is moved to Schedule III, cannabis businesses will not fall under 280E. The 280E statute is clear: it only applies to Schedule I and II substances. Rescheduling should end 280E’s reach over cannabis, allowing operators to deduct expenses such as rent, payroll, marketing, and administrative costs.

Timing and Continuing Uncertainty

It is important to note that 280E does not disappear immediately. The executive order starts and speeds up the rescheduling process, but marijuana stays in Schedule I until a final rule becomes effective. A final rule may arrive by mid-2026, but timing is uncertain.

Legal challenges from prohibitionist groups will likely follow the rescheduling rule. The federal government now supports rescheduling, but litigation could delay its effect. Until the change is final, the IRS will likely keep enforcing 280E.

Stronger Position for Cannabis Taxpayers

When rescheduling is done, 280E’s legal importance changes. Section 280E should no longer be an issue. This often leads the IRS to be more open to audits and settlements. The statutory case is stronger, as marijuana’s scheduling will be settled by regulation.

What Operators Should Do Now

Cannabis operators should keep complying with 280E until rescheduling is final. Strong documentation and reasonable-basis positions remain important. Disclose where appropriate. Also, start planning for a post-280E tax environment. Model cash flow impacts and revisit accounting or entity decisions.

Bottom Line

Marijuana’s expected move to Schedule III is a major federal step for the cannabis industry. Uncertainty remains in the short term, but the long-term direction is clearer: the end of IRC 280E for cannabis operators may occur soon. Planning today helps businesses benefit once the change is effective.