Marijuana Reclassification

On April 23, 2026, the Department of Justice announced an order immediately reclassifying FDA-approved products containing marijuana and marijuana products regulated by a state medical marijuana license from Schedule I to Schedule III of the Controlled Substances Act, as well as the initiation of an expedited administrative hearing process to consider the broader rescheduling of marijuana from Schedule I to Schedule III. The DEA will hold public hearings beginning June 29, 2026, regarding the proposed rescheduling of marijuana.

Federal Income Tax Implications for Business Owners

For dispensaries and cannabis businesses, the biggest change is financial rather than operational. Section 280E of the Internal Revenue Code prohibits deductions or credits for any amount paid or incurred in carrying on a trade or business involving controlled substances (within the meaning of Schedule I and Schedule II of the Controlled Substances Act).

Prior to reclassification, business owners involved in the cannabis industry were unable to deduct typical ordinary and necessary business expenses as marijuana was classified as a Schedule I controlled substance. These typical business expenses include ordinary expenses such as rent, salaries and wages, utilities, supplies, and other items.

With the reclassification of approved marijuana products to a Schedule III controlled substance, business owners will no longer be prohibited from deducting ordinary business expenses pursuant to Section 280E. This change could result in significant improvement in profit margins for business owners.

Other Implications for Business Owners

Additionally, cannabis business owners may see other financial and business benefits. Many business owners were unable to access traditional banks and encountered difficulty in securing loans or outside investment. The recent reclassification may increase access to federally chartered banking institutions and other financial tools (loans, equity lines, investment access, etc.) for business owners.

Remaining Questions

While the announcement is positive for cannabis business owners several questions remain. First, the announcement does not specify when the change will be effective and whether business owners will be able to retroactively claim deductions. Second, the reclassification applies to both FDA-approved products containing marijuana and marijuana products regulated by a state medical marijuana license. The announcement does not specify any changes to marijuana products for recreational use, but additional developments may be forthcoming.

Conclusion

While reclassification does not legalize marijuana, it dramatically improves the economics of running a marijuana business. The removal of the §280E prohibition is expected to increase profitability and cash flow across the industry, making this primarily a tax and financial game-changer rather than a full legal one.

This article is for informational purposes only and should not be considered legal advice.
If you have additional questions, schedule a consultation with the Law Office of Jonathan D. Mishkin, P.C.