Department of Justice Formally Reclassifies Medical Cannabis in First Step After Executive Order

On April 23, 2026, the US Department of Justice (DOJ) published an order formally reclassifying FDA-approved cannabis products and products containing cannabis subject to a qualifying state issued license from Schedule I to Schedule III under the Controlled Substances Act.

This development follows President Trump’s December 2025 executive order, which directed federal agencies to accelerate efforts to reschedule cannabis. At the time, the executive order showed policy momentum but did not change cannabis’ classification. This action by the DOJ represents the first regulatory change and creates immediate tax and compliance considerations for cannabis businesses.

Key Takeaways

• On April 23, 2026, the DOJ formally reclassified FDA-approved cannabis products and state-licensed medical cannabis from Schedule I to Schedule III under the Controlled Substances Act.
• Because Schedule III substances fall outside IRC Sec. 280E, qualifying medical cannabis businesses may now deduct ordinary and necessary business expenses that were previously disallowed.
• The DOJ's order does not apply to recreational cannabis, which remains a Schedule I substance subject to IRC Sec. 280E restrictions.
• The executive order specifically urges the Treasury to provide retrospective tax relief, which could allow eligible businesses to file amended returns for prior tax years.
• Cannabis businesses may now benefit from provisions in the One Big Beautiful Bill Act, including 100% bonus depreciation, expanded IRC Sec. 179 expensing, and immediate R&D expense deductions.
• The DOJ will continue expedited hearings on broader cannabis reclassification beginning in June 2026, and Schedule III substances still require DEA registration for plant-touching businesses.

How Does IRC Sec. 280E Affect Cannabis Businesses?

For decades, cannabis has been classified as a Schedule I substance. This level is reserved for substances that are considered to have no medical use and a high potential for abuse. Under IRC Sec. 280E, businesses that consist of “trafficking in controlled substances” are disallowed from taking any deduction or credit from or against their gross income, other than cost of goods sold (COGS). This includes any substance that is classified as Schedule I or Schedule II under the Controlled Substances Act. Accordingly, businesses that cultivate, refine, purchase, or sell cannabis have only been allowed to deduct COGS under the tax code for decades.

The DOJ announcement appears limited to FDA-approved cannabis products and products regulated under state medical cannabis licensing programs, and additional federal guidance may be needed to clarify how the reclassification applies to recreational operators and other cannabis businesses.

What Are the Tax Impacts of Cannabis Reclassification?

The tax consequences of rescheduling are no longer hypothetical. Because Schedule III substances are not subject to IRC 280E, businesses selling FDA-approved cannabis products and products containing cannabis subject to a qualifying state-issued license may now be able to deduct ordinary and necessary business expenses that were previously disallowed under federal law.

Qualifying cannabis businesses may now be able to deduct ordinary and necessary business expenses that were previously disallowed under federal law. It is unclear if under IRC Sec. 280E cannabis business owners will now be able to claim the qualified business income (QBI) deduction, considering a recent tax court ruling addressed this question.

The directive also specifically urges the Treasury to provide retrospective tax relief. If the Treasury agrees with the recommendation, eligible businesses may be able to file amended tax returns to claim refunds.

This change coincides with significant business-friendly tax changes under the One Big Beautiful Bill Act (OBBBA). For instance, the OBBBA revived 100% bonus depreciation and increased the amount of expensing allowed under IRC Sec. 179 to $2.5 million. Eligible cannabis businesses should now be allowed to deduct the full amount of equipment purchased and placed in service.

The OBBBA also revived the ability for businesses to deduct their domestic research and development expenses in the year in which they are incurred, instead of requiring these expenses to be capitalized and amortized over five years. Cannabis businesses may be able to deduct any eligible R&D expenses they incur. Additionally, they may now be eligible to take the R&D credit under IRC Sec. 41 as well.

Treasury and the IRS announced that they intend to release guidance to address the federal tax consequences of the order. While few details were given, the announcement stated that there would likely be a transition rule providing that the rescheduling will first apply for a business’s full taxable year that includes the effective date of the DOJ’s final order.

How Does Reclassification Affect State Cannabis Tax Rules?

Many states have legalized medicinal and/or recreational cannabis for years. However, the DOJ’s order applies only to FDA approved cannabis products and products containing cannabis subject to a qualifying state-issued license. Recreational cannabis remains federally prohibited. Some states have passed legislation specifically decoupling from IRC Sec. 280E to allow businesses to claim state deductions and credits, and it remains unclear whether states will revisit those rules following this narrower federal change.

While the April 23, 2026, order represents one of the most significant federal cannabis policy developments, broader rescheduling questions are still unresolved. The DOJ stated that it will continue expediting hearings regarding broader cannabis reclassification beginning in June.

Additionally, Schedule III substances are still controlled substances and subject to stringent regulation. Companies will still be required to register with the Drug Enforcement Agency if they are considered “plant-touching” businesses.

Contact our team below if you have questions about how this change could benefit your company.