Cannabis Rescheduling’s Compliance Costs Will Dent Tax Savings

The Department of Justice’s order last week to reschedule medical cannabis creates a dual system in which medical cannabis is a Schedule III controlled substance while adult-use cannabis remains on Schedule I of the Controlled Substances Act. Medical cannabis businesses will see more tax savings but also higher compliance costs.

Significant tax breaks should flow to cannabis companies with medical licenses and to individual taxpayers, who will be able to deduct their cannabis prescriptions under Section 213 of the federal tax code. Tax professionals will need to tailor their actions depending on whether their clients have a medical cannabis license, are licensed to sell cannabis to medical and recreational users, or are some other variant designated by the client’s state.

The good news for cannabis companies with medical cannabis licenses is that Section 280E no longer applies to them, leaving all ordinary and necessary business expenses deductible at the federal level. Such companies will need to work with their lawyers and accountants to close out separate administrative and management companies that no longer make business sense or save taxes.

Possible inter-entity transfer pricing problems may also need to be addressed. Tax professionals of medical companies should reexamine the use of Section 471(c), which has allowed those businesses to more favorably allocate business expenditures to cost of goods sold.

In a non-280E environment, prior tax assumptions may need to be unwound to avoid income distortion. Section 471(c) will now govern when, not whether, costs are recovered. Income smoothing, deferred deductions, and working capital optimization will be main focuses.

The vertical integration of cannabis businesses was often tax-motivated to maximize cost of goods sold. But under Schedule III, that tax logic weakens, and some inefficient structures that existed only to fight 280E may also need to be unwound. This may have mergers-and-acquisitions implications as well. Changing the structures and cost allocations among a group of companies involved in a sale would alter EBITDA, which would likely necessitate adjusting the terms of that transaction.

Another issue affecting medical-only cannabis companies is Drug Enforcement Administration compliance. In his order, acting Attorney General Todd Blanche referenced the US’ obligations under the Single Convention on Narcotic Drugs, 1961, a seminal international treaty created to combat illicit substances.

Blanche noted this treaty will require medical cannabis licensees to register with the DEA and that cannabis producers sell all products to the DEA—which would sell it back to the producers for cost plus an administrative fee. Current DEA business registration fees are:

• Manufacturers: $3,699 annually
• Distributors: $1,850 annually
• Dispensers: $888 for a three-year registration

Administrative fees on sales aren’t yet known but would be related to the recapture of DEA cannabis oversight program costs.

The increased DEA compliance costs will partially offset the tax savings achieved by 280E’s nullification. Schedule III drugs fall into a regulatory universe where issues such as medical claims, manufacturing and labeling consistency, and adverse event reporting matter more. This will increase capital and administrative expenditures, which could put smaller operators at a long-term disadvantage.

In its initial response to the rescheduling order, the Treasury Department noted that expenses could be apportioned for entities with multiple activities (companies that handle both medical and recreational cannabis). However, cannabis businesses in states with both medical and adult use, such as California and New York, must discuss with their accountants whether there is enough tax savings to proactively separate medical and adult-use business lines.

In those mixed states, the portion of medical sales has become insignificant. California, for example, issued medical cannabis cards to only 1,478 patients in 2025-2026. Anecdotally, we have seen retail companies with only 5% to 10% medical sales (sales to patients who have a prescription, but who aren’t registered with the state).

Cannabis companies in mixed states may want to speak to an attorney about whether it makes sense to have separate businesses for each license to comply with DEA requirements—or whether medical sales are no longer a good idea.

Tax professionals need to await IRS guidance on when 280E will no longer apply. In his order, Blanche encouraged the Secretary of the Treasury “to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license.”

But the Treasury’s immediate response said rescheduling would be considered to first apply for the business’s full taxable year that includes the effective date of the final order—that is, to apply starting 2026 and not before. It promised further IRS guidance.

If the IRS decides to lift 280E restrictions as of the date of the final order, April 22, tax complications could arise. They might require a mid-year effective date, which would lead to allocation issues, potential method changes, and mid-year accounting elections.

Blanche’s rescheduling order states that any activity involving Schedule I (recreational) marijuana is unlawful and may incur administrative, civil, and/or criminal sanctions. This means another set of enforcement eyes will be on recreational cannabis and mixed-use businesses, which won’t make doing business for those companies any easier. There’s a risk of operators being sued for not providing FDA-approved cannabis.

The rescheduling may reduce some of cannabis’s stigma but likely won’t have much effect on banking or access to bank products and services. Suspicious Activity Report obligations, reputational risk, and state-federal mismatch remain. The traditionally conservative banking industry is unlikely to move much from its current position.

The DEA has set the hearing to reschedule recreational cannabis to Schedule III to begin June 29 and conclude no later than July 15. This isn’t necessarily a slam dunk, and medical cannabis having been “peeled away” from its less-defensible recreational sibling may make achievement of a fully rescheduled marijuana harder still.

Leaving such a Schedule I-Schedule III split in place for the long term would make a complicated mess for operators and their advisers to muddle through. We can only hope for a positive resolution, and that the DEA doesn’t leave the US cannabis industry with more issues created than resolved.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Abraham Finberg is principal at AB Fin and has worked in the cannabis sector since 2009, counseling clients in all phases of business advisory and tax.

Simon Menkes supports accounting firms, their clients, and advisers through accounting and advisory services.

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