Trump Order on Marijuana Rescheduling Doesn’t Cancel State Laws

President Donald Trump’s Dec. 18 executive order to expedite the reclassification of marijuana indicates a decreasing stigma against cannabis. It also offers the possibility of future tax savings.

This is a pivotal moment for the cannabis industry, but it’s not the finish line.

The process of rescheduling cannabis from Schedule I to Schedule III under the Controlled Substances Act isn’t final yet. The Department of Justice and Drug Enforcement Agency first must navigate the public comment period and then publish the rule in the Federal Register, all of which could be a lengthy process, especially if the rescheduling faces litigation.

For now, cannabis remains under Section 280E of the Internal Revenue Code, which prohibits businesses trafficking in Schedule I or II substances from deducting ordinary business expenses. If cannabis officially moves to Schedule III, 280E no longer will apply to cannabis businesses, and operators can start taking standard deductions, slashing their tax burden.

The removal of 280E is expected to be prospective only, meaning it will apply to tax years starting with the one in which the DEA’s final rule takes effect. The IRS usually doesn’t allow retroactive amendments to prior year returns, with the only possible exception being an improbable directive from Congress to do so. Businesses should expect to file 2025 returns under the current 280E regime and plan for relief in future years after rescheduling is finalized.

Some advisers suggest filing protective refund claims in case future IRS guidance allows for retroactive application, but this is risky and speculative. Risks include the additional expense, the high likelihood that the new tax treatment won’t be retroactive, and that filing such a claim will lead to increased scrutiny of the return in the manner of a standard examination.

Even with the federal rescheduling, states retain the authority to classify cannabis as they see fit. If a state where cannabis is illegal continues to treat cannabis as a Schedule I controlled substance, state-level restrictions and penalties remain in force, regardless of federal changes.

State tax conformity with federal law varies. Some states automatically follow federal scheduling, while others set their own rules. Businesses must continue to comply with both state and federal law, and state-level 280E regulations may persist unless state legislatures act to change them.

Section 280E’s language is clear that for businesses selling controlled substances prohibited by federal law “or the law of any State in which such trade or business is conducted,” deductions or credits don’t apply.

This means that even if cannabis is rescheduled federally, 280E will still apply on a federal level to businesses operating in states where cannabis remains illegal. The 280E ban on deductions is triggered by either federal or state illegality. If a state keeps cannabis as a Schedule I controlled substance, businesses in that state remain subject to 280E’s harsh tax treatment.

While the eventual rescheduling of cannabis will have positive tax implications, the country’s cannabis industry will still be out of compliance with the required federal treatment of a Schedule III controlled substance. This means that neither interstate commerce nor interstate banking and lending (the major banks) would automatically become available to cannabis.

Both would require intervention from Congress; the SAFER Banking Act, which looks to bridge the gap between state-legal cannabis companies and the federal system, is one piece of legislation seeking to change this.

Although the president’s order is nowhere near the full federal legalization cannabis operators wish for, it demonstrates a softening in the federal government’s anti-cannabis stance and offers substantial future tax savings.

More work will need to be done, however, to make interstate banking, lending, and trade a reality. Cannabis business operators should stay vigilant, consult with tax professionals, and monitor both federal and state developments closely.

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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