On April 22, the Drug Enforcement Administration (DEA) changed the tax landscape by issuing a final order that rescheduled certain marijuana products. The order impacted both FDA-approved drug products containing marijuana, as well as those products subject to a qualifying state-issued medical marijuana license from Schedule I to Schedule III of the Controlled Substances Act (CSA). Treasury and the IRS expect the DOJ’s action to have significant positive tax consequences for businesses in the medical marijuana industry. For now, products outside of this scope, including those that are legal under state recreational laws, are still considered to be Schedule I and are not immediately impacted by this order.

The reclassification process of cannabis has been lengthy. Since the CSA initially passed in 1970, cannabis has been classified as a Schedule I drug, which is reserved for substances with the highest potential for abuse, recognized as having no accepted medical use, and having minimal accepted research applications. The DEA had previously attempted to reclassify cannabis in 2016, requiring a five-year study, which ultimately failed. More recently, the rescheduling process was reinitiated in 2024, only to be interrupted by the change in administrations.

This move, and the promise of additional actions to come, will allow taxpayers in the affected industries to not only take advantage of federal deductions that were previously barred, but also other incentives, including the Research and Development tax credit.

Current Federal Tax Treatment

Due to previous classification as a Schedule I controlled substance by the CSA, state-licensed medical marijuana businesses had been subject to the ordinary and necessary business expenses deduction disallowance imposed by Section 280E of the Internal Revenue Code (IRC). Up until the issuance of this final order, affected businesses were unable to deduct selling, general, and administrative expenses and were limited to deducting only the cost of goods sold. By way of Section 280E, affected businesses were additionally prevented from fully expensing their domestic research and development (R&D) expenditures under Section 174A of the IRC.

State-Level Treatment

States have largely outpaced the federal government in the legalization of cannabis. As of 2026, the use of medical marijuana has been legalized in 42 states. Of those, 24 states have legalized the use of recreational marijuana.

Prior to the issuance of the DEA’s order, several jurisdictions had proactively reduced the tax burden of Section 280E at the state level. As a leader in this sector, Colorado was the first state to decouple from Section 280E in 2014. This allowed state-licensed medical cannabis businesses to claim ordinary and necessary business deductions on their state income tax returns. Other states have followed suit, notably Oregon, Michigan, Illinois, Massachusetts, Missouri, and California, which make up the largest cannabis markets in the U.S. Further, many of these states offer R&D tax credits as a business incentive, and with cannabis moving from Schedule I to Schedule III, this could lead to interesting federal and state R&D tax credit benefits for cannabis businesses.

California currently boasts the largest cannabis industry in the U.S., with $3.97 billion in total taxable sales in 2025. California has created favorable tax policies specifically for the cannabis industry. These tax policies include industry-specific incentives, such as the High Roads Tax Credit, which provides qualified cannabis businesses a tax credit equal to 25% of their qualified annual expenditures, and the Cannabis Equity Tax Credit, which provides an annual tax credit of $10,000 for qualified cannabis businesses seeking to enter the industry.

State‑level decoupling from Section 280E has played a major role in where cannabis businesses have chosen to locate their operations, and the continued availability of state-level R&D and other tax credits will continue to influence these decisions. This favorable treatment will not change with the new order, and taxpayers may continue to receive the benefits on their state tax returns, but may also receive similar treatment on their federal return.

Immediate Changes

The DOJ’s Order is limited to only FDA-approved products and products that are subject to a qualifying state-issued license. Therefore, states that have legalized only the medical use of cannabis will experience the most widespread impacts among cannabis businesses from the DEA’s order. The primary impact of this change is the treatment at the federal level. Taxpayers in states that have already decoupled from 280E and allow eligible expenses to be deducted at the state level will continue to do so. But now, those same companies may be able to do so on their federal return.

Florida is the largest medical-only cannabis market in the U.S., with $1.65 billion in total taxable sales in 2025 and 890,402 Florida Medical Marijuana Identification Cards issued as of 2024. Additionally, Florida never decoupled from 280E. Because only medical cannabis licenses exist in Florida, all cannabis businesses in this state will be released from Section 280E. The resulting reduction in federal tax liability will also help on the state level and enable all cannabis businesses in Florida to further expand their medical operations, including activities eligible under Section 174A.

The DEA’s order may have less widespread impacts on the federal tax liability of cannabis businesses located in states that have legalized both medical and recreational use of marijuana. While California has the largest cannabis industry in the U.S., there were only 2,800 California Medical Marijuana Identification Cards issued as of 2024, which represents only a small fraction of the state’s overall cannabis market. Due to the legalization of recreational cannabis use in California, the state’s cannabis industry is largely catered towards recreational use due to ease of accessibility. The few cannabis businesses in California that operate under a medical license, or that sell FDA-approved products, will experience a reduction in their federal tax liability pursuant to the order; however, recreational or dual-licensed businesses, which represent the vast majority of the state’s market, will experience little or no reduction. This may incentivize cannabis businesses located in California and similarly situated states to expand or begin medical operations in order to claim section 174A benefits and ordinary and necessary business deductions at the federal level. California already allows eligible expenses to be deducted, meaning the state-level return is unlikely to change.

Similarly, Illinois, which has historically had separate licensing for medical versus recreational activities, is now moving towards a unified licensing structure. Dual operators are still required to maintain separate inventories, books, and records, thereby allowing them to take advantage of the DEA Order for eligible products. But the recreational-focused products will not benefit from this change.

Businesses that operate under both medical and recreational licenses may also be required to allocate their ordinary and necessary business expenditures separately to claim federal deductions and credits related to their medical operations.

Future Changes

In addition to the Final Order, the DOJ released a “notice of hearing on proposed rulemaking” to expand the scope of the reclassification efforts. This notice builds on the previous proposed rulemaking issued in 2024 that would transfer marijuana from Schedule I of the CSA to Schedule III, opening the way for non-medically licensed facilities to benefit from the change. However, this will not be a quick process. The DOJ will need to proceed through the Notice-and-Comment process to satisfy the Administrative Procedure Act, which will likely take months, if not years, to complete. Once completed, all cannabis-related businesses will likely be able to deduct ordinary expenses and take advantage of federal incentives.

The Department of the Treasury issued a press release on April 23, 2026, announcing its intent to provide guidance on the federal tax consequences of the DEA’s order. Anticipated guidance is likely to clarify how Section 280E will apply to businesses with both medical and recreational licenses. Guidance will also include a transition rule stating that Section 280E relief will apply to the full 2026 taxable year. The DEA included a request in its order for the IRS to consider providing retroactive relief from Section 280E for previous tax years during which a business operated under a state medical license; it is unclear whether this will materialize. The scope and contours of the transition rules will be important for taxpayers and their advisors.

As of now, affected taxpayers in the cannabis industry can expect to benefit from increased eligibility for deductions, thereby reducing their federal tax liability starting in 2026. Taxpayers should additionally begin identifying federally eligible ordinary and necessary business deductions, as well as any Section 174A qualifying expenses. Those taxpayers who operate under a State-issued medical license should consult with an advisor on how best to capture eligible expenses and further explore whether the activities they perform or costs incurred may now qualify for R&D tax credits, as well as other relevant state (e.g., job creation) and federal credits (e.g., WOTC).