- within Transport and Insurance topic(s)
Takeaways
- President Trump's executive order significantly accelerates the long-stalled federal process to reschedule marijuana to Schedule III.
- Rescheduling could eliminate Internal Revenue Code Section 280E, fundamentally changing the tax economics of cannabis businesses.
- A move to Schedule III could unlock new federal opportunities, including potential access to trademark protections previously unavailable to cannabis operators.
On December 18, 2025, President Trump signed an executive order to fast-track the reclassification of marijuana from Schedule I to Schedule III under the Controlled Substances Act (CSA). Schedule I is the most restrictive classification under the CSA and is reserved for drugs with no currently accepted medical use and a high potential for abuse. Other Schedule I drugs include heroin, LSD, and ecstasy. By contrast, Schedule III drugs are those with a moderate to low potential for physical and psychological dependence, such as Tylenol with codeine. The gravity of this decision and its impact on the cannabis industry cannot be overstated.
As some may recall, the Biden administration started the process of rescheduling marijuana. However, the Biden administration's directive became mired in bureaucracy as the directive was not simply to reschedule marijuana—instead, in October 2022, President Biden directed the United States Secretary of Health and Human Services ("HHS") to review marijuana's federal scheduling status. In August 2023, HHS recommended to the Drug Enforcement Administration ("DEA") that marijuana be moved from Schedule I to Schedule III. Following that recommendation, the DEA largely sat on its hands until May 2024, when then-Attorney General Merrick Garland stepped in and issued a notice of proposed rulemaking to reschedule marijuana to Schedule III. However, that rulemaking process was still overseen by DEA, which decided to hold an administrative hearing on the proposed rule, which quickly became quagmired in claims of impropriety by DEA and eventually led to appeals to the United States Court of Appeals for the Federal Circuit and a stay of the administrative hearings, which is where they have largely stayed until today.
President Trump's executive order directs the Attorney General to "take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law, including 21 U.S.C. 811."
While not certain to occur, the most expeditious path forward would be for the Attorney General to forgo the current pending administrative hearing and just proceed forward with issuing a final rule to reschedule marijuana to Schedule III, which could take effect as soon as 30 days after it is issued.
The most immediate impact of the rescheduling of marijuana to Schedule III is that it eliminates the onerous and tremendously unfair burden of 26 U.S.C. 280E. As all cannabis businesses are intimately aware, 280E disallows all deductions (except for cost of goods sold) for businesses engaged in the trafficking of Schedule I or Schedule II controlled substances, which has historically included marijuana. The sum total of 280E's punitive impact has led to some operators paying an effective tax rate of roughly 70 percent or more. We have previously discussed the ramifications of rescheduling and its 280E impacts in this blog, and we have a detailed discussion on A Higher Law that is well worth another listen.
Rescheduling may have other impacts that remain to be seen. For example, rescheduling may open the door to federal trademark registrations on marijuana products that were previously off limits. We anticipate that it will take the United States Patent and Trademark Office some time to decide how to handle marijuana-related trademark applications in light of rescheduling.
We will have more to come on the impacts of rescheduling, along with any updates on the timing of rescheduling. All cannabis operators should be taking steps to revisit their tax planning strategies with their accounting and legal professionals. As we previously noted, tax strategies taken in avoidance of the most punitive effects of 280E, such as C Corporation elections, may no longer make sense in a post-280E landscape. As of the date of this post, it is highly probable that rescheduling will happen sometime in 2026 (as opposed to taking effect in 2025). As a result, cannabis operators will want to plan ahead to make any necessary business or structural changes to get their businesses into a tax-efficient structure for a post-280E world.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
