Cannabis & Craft Beer Blog

Key Takeaways

The rescheduling of certain cannabis products to Schedule III represents a meaningful shift in federal cannabis policy and offers long-awaited tax relief for portions of the industry. However, the benefits are limited in scope, leaving recreational operators subject to the continued constraints of Section 280E. Additionally, critical questions—such as the ability to obtain retroactive relief—remain unresolved. Until regulatory and IRS guidance provides greater clarity, cannabis businesses and their advisors should carefully evaluate their tax positions and compliance strategies in light of this evolving landscape.

For decades, Internal Revenue Code Section 280E has denied cannabis businesses the ability to deduct ordinary operating expenses­—but that regime may finally be starting to unravel. On April 22, 2026, the United States Acting Attorney General rescheduled certain categories of cannabis from Schedule I to Schedule III of the Controlled Substances Act (“CSA”). Since its adoption, cannabis has been firmly planted on Schedule I. Although the Attorney General’s final rule does not reclassify all forms of cannabis, this shift does have important implications. Most importantly, perhaps, it will grant some cannabis businesses access to critical tax benefits.

Section 280E disallows tax deductions and credits for businesses engaged in trafficking controlled substances, as identified on Schedule I and II of the CSA. Section 280E effectively blocks cannabis operations from writing off ordinary and necessary business expenses in order to reduce tax liability. While a cannabis business may be duly licensed and legally operating, they receive unfavorable tax treatment compared to other, non- cannabis businesses.

The CSA, originally adopted in 1970, regulates certain drugs and other substances based upon the potential for abuse, safety, and medical use. Drugs and substances governed by the CSA are divided into categories based on the relative risk level and medical utility. These categories are known as Schedules I through V, in which Schedule I is subject to the strictest regulation and Schedule V enjoys the least oversight. As a Schedule I controlled substance, cannabis has historically been subject to the strictest regulation. One example of this strict regulation includes a denial of tax deductions for businesses selling cannabis.

The rescheduling removes some of the sting of Section 280E. These reclassified categories of cannabis include (i) drug products containing cannabis that have been approved by the Food and Drug Administration (“FDA”) and (ii) marijuana subject to a state-issued license to manufacture, distribute and/or dispense cannabis for medical purposes only. Critically, adult use or “recreational” cannabis remains on Schedule I and continues to be subject to Section 280E. But businesses dealing in FDA-approved cannabis products and medical cannabis licensees will finally be able to avoid the pain of Section 280E.

One of the most significant unanswered questions is whether the rescheduling will have any retroactive effect for prior tax years. Section 280E applies based on a taxpayer’s involvement with Schedule I or II substances during the relevant taxable year, and the rescheduling rule does not expressly address whether taxpayers may amend prior returns to claim previously disallowed deductions. Currently, it remains unclear how the Internal Revenue Service will treat previously disallowed deductions under Section 280E. Until further guidance is issued, taxpayers should proceed cautiously.

Please feel free to contact a member of the KMK Law Cannabis & Craft Beer Services team should your business need assistance with navigating these new rules, or any future revisions, rules, or regulations.