On December 18, 2025, President Trump signed an executive order directing the federal government to begin the process of moving marijuana from a Schedule I to a Schedule III controlled substance under the Controlled Substances Act (CSA). The order instructs the Justice Department and Drug Enforcement Administration (DEA) to carry out the administrative steps required for rescheduling.  

This action follows a 2022 directive by President Biden, requesting that federal agencies review the classification of marijuana. This process had produced limited progress until the issuance of this executive order. While rescheduling does not legalize marijuana at the federal level, it removes one of the most punitive federal barriers facing cannabis businesses. This article examines the legal, tax, and business implications of that shift for a federally prohibited industry that continues to move toward normalization.  

The Controlled Substances Act was passed in 1970. This act centralized drug regulation, taking into account medical use, public health, and law enforcement considerations. Administered primarily by the Department of Health and Human Services (HHS) and the DEA, it classifies drugs on a graduated scale from most restricted (Schedule I) to least restricted (Schedule III). Schedule I drugs are considered to have no accepted medical use and can not be prescribed. Other drugs in this category are heroin, LSD, and MDMA. Schedule III drugs have a recognized medical use, acknowledgment of moderate abuse potential, and are prescribable under federal regulations. Drugs in this category include testosterone, ketamine, and Tylenol with Codeine. It is worth mentioning that fentanyl is currently a Schedule II narcotic, meaning that it is less dangerous than marijuana. The reclassing of marijuana to Schedule III reflects growing recognition of medical utility as well as the impacts on businesses in the many states where it is currently legal.  

The current Schedule I classification causes cannabis businesses to be treated unlike nearly any other lawful enterprise for federal income tax purposes. Under IRS Code Section 280E, businesses that traffic in Schedule I or Schedule II controlled substances are denied deductions and credits for ordinary business expenses. As a result, cannabis companies may generally reduce taxable income only through cost of goods sold. At the same time, expenses such as rent, wages, payroll taxes, security, utilities, insurance, business license, and professional fees remain nondeductible. This framework produces unusually high effective income tax rates and, in many cases, federal tax liabilities that bear little relationship to a business’s actual economic profitability.  

Section 280E was enacted in the early 1980s to prevent illegal drug traffickers from deducting business expenses, not to address state-licensed businesses operating under comprehensive regulatory frameworks. Rescheduling marijuana to Schedule III would remove cannabis businesses from the narrow class of entities subject to Section 280E, allowing them to be taxed under the same general rules that apply to other regulated industries. From a tax perspective, Section 280E has long distorted financial reporting in ways that complicate both compliance and valuation.  

The schedule change would permit cannabis businesses to deduct ordinary operating expenses for federal income tax purposes. As a result, taxable income and corresponding tax liabilities would decline, improving net income and cash flow. Increased liquidity could allow operators to reinvest in their businesses, expand operations, raise wages, and compete more effectively with illicit market participants. Viewed in this light, the change is less a form of tax relief and more a correction that allows the industry to operate under the same tax framework applied to most other lawful businesses. State-level income tax typically follows Federal law, with state-level specific rules and adjustments. Nevada does not have state-level income taxes; however, it does have a wholesale cannabis tax and a sales tax that will remain unaffected by this schedule change. For operators in states with income tax, it should provide an additional level of tax reduction.  

Federal tax credits and other deductions currently disallowed will become available to the cannabis industry. Tax credits and deductions for retirement contributions, employee health insurance expenses, and, importantly, IRS Code Section 199A, the Qualified Business Income Deduction. This deduction was enacted in 2017 and allows certain companies to deduct 20% of their net income, subject to various rules and limitations. Tax planning for cannabis companies will be critical and valuable.  

By restoring ordinary deductions, rescheduling is expected to increase normalized earnings and reduce reliance on heavily adjusted financial metrics. That shift may change valuation analysis and expand investor appetite. As financial performance becomes easier to evaluate and compare, merger and acquisition activity is likely to increase. Barriers to this remain, however, with various state-level ownership regulations.    

While rescheduling marijuana to Schedule III does not require financial institutions to provide banking services to cannabis businesses, it is widely viewed as a step that could reduce perceived regulatory and enforcement risk. As a result, some banks and credit unions may become more willing to serve the industry, particularly in states with established regulatory frameworks. Any expansion of banking access is likely to be incremental. The most relevant legislative response to this is the SAFER Banking Act. This bipartisan bill has not yet passed, but it is viewed as a necessary step for banking normalization even after the rescheduling is complete.  

Schedule III classification reflects a federal acknowledgment that marijuana has accepted medical use. That determination matters because it changes how the substance is treated under federal regulatory frameworks, particularly outside the criminal context. Moving marijuana out of Schedule I reduces barriers to clinical research and lowers the level of institutional risk faced by universities, hospitals, and pharmaceutical developers. It does not amount to FDA approval, nor does it legalize marijuana at the federal level. It does, however, make it easier to study cannabis-derived treatments within the same regulatory system that governs other controlled medications. Over time, this shift could lead to more consistent medical standards, more explicit prescribing guidance, and the development of federally approved cannabis-based drugs. Those developments would not be confined to the cannabis industry. Employers, insurers, and other businesses may eventually feel downstream effects as medical use becomes more standardized and better understood. For instance, how does an employer react to employees who are lawfully prescribed marijuana?

Rescheduling Marijuana to Schedule III does not fix every legal or regulatory issue facing the cannabis industry, but it changes the federal framework in which these issues are addressed. Removing Section 280E represents a fundamental shift in how these businesses are taxed, while federal recognition of medical utility is expected to increase research and institutional participation. Together, these changes reduce friction between legal state markets and federal law without eliminating the need for careful compliance and planning. For operators, investors, and advisors, this marks a transition point that brings the industry closer to normalization while introducing some new complexity and opportunity.  

Donovan Thiessen, CPA is the founder and owner of The Accountant, LLC. You may reach Donovan at donovan@theaccounantcpa.com, www.theaccountant.cpa, and 702.389.2727.