The cannabis industry experienced a seismic shift this week as news broke that President Trump is preparing to issue an executive order directing federal agencies to reclassify cannabis from Schedule I to Schedule III. While no final decisions have been made according to White House officials, multiple sources including The Washington Post and CNBC report the order could come as early as this coming week, with the Drug Enforcement Administration potentially finalizing the reclassification by summer.
Industry leaders are calling this development a “partial victory” rather than complete legalization. While rescheduling would provide significant tax relief, it introduces new regulatory complications that small cannabis businesses need to understand. As Shawn Hauser, partner at cannabis-focused law firm Vicente LLP, noted, the sector will need to continue fighting for comprehensive legalization. The momentum may press Congress to create a proper regulatory framework offering broader changes around safety, access, and criminal justice reform than what rescheduling alone provides.
Moving cannabis to Schedule III creates an immediate concern for small cannabis operators: potential FDA regulation. Schedule III drugs are FDA-approved, regulated pharmaceuticals. Unlike your current state regulatory framework, FDA approval processes are expensive, time-consuming, and designed for pharmaceutical companies with substantial resources.
Small cannabis businesses that have built operations around state compliance programs may find themselves facing a completely different regulatory regime. The FDA approval pathway typically requires extensive clinical trials, manufacturing compliance with current Good Manufacturing Practices (cGMP), detailed labeling requirements, and ongoing post-market surveillance. These requirements can cost millions of dollars and take years to complete—resources most small cannabis operators simply don’t have.
The industry recognizes this challenge. There’s no clarity yet on whether existing state-licensed cannabis operations would be grandfathered, whether a separate regulatory pathway would be created, or whether small operators would be expected to navigate the same FDA processes as pharmaceutical manufacturers. This uncertainty is precisely why advocates emphasize that rescheduling represents only the beginning of necessary policy changes, not the end goal.
Congressional action remains essential to create a sensible regulatory framework that acknowledges cannabis’s unique position as both a state-regulated industry and a federally controlled substance. Without legislative clarity, small businesses could find themselves caught between state programs that have worked successfully for years and new federal requirements designed for an entirely different industry.
For cannabis business owners, this potential change represents the most significant tax development in the industry’s modern history. The immediate impact centers on Section 280E of the Internal Revenue Code, which currently prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses. This provision has forced cannabis operators to pay federal taxes on gross profit rather than net income, creating effective tax rates that can exceed 70% of actual business income.
If cannabis moves to Schedule III—joining substances like steroids and Tylenol with codeine—your business would no longer fall under 280E restrictions. This means you could deduct normal operating expenses, including rent, salaries, marketing costs, professional services, and all the other expenses that every other legal business takes for granted. The tax savings would be substantial and immediate.
It’s critical to understand that rescheduling would not make cannabis federally legal. Cannabis would remain a controlled substance, and state-licensed operations would continue operating under existing state regulatory frameworks. However, the change would fundamentally alter how your business interacts with the federal tax system and would likely ease banking restrictions that have plagued the industry.
The uncertainty around timing creates both opportunity and risk. President Biden’s administration proposed rescheduling in 2024, but that rule has been stalled since March. Trump’s executive order approach could accelerate the timeline, but implementation through the DEA rulemaking process will still take months. Congressional resistance, including reported pushback from House Speaker Mike Johnson, could further complicate matters.
Given this landscape, you need to start preparing now while maintaining flexibility. First, review your current accounting methods and ensure you’re properly tracking all business expenses. Many cannabis operators have developed abbreviated expense tracking because those costs weren’t deductible anyway. You’ll need comprehensive records when 280E relief arrives.
Second, examine your entity structure. Some cannabis businesses chose C corporation structures specifically to manage 280E impacts. Rescheduling may change the optimal entity choice for your operation. Don’t make any structural changes yet, but understand what options might become advantageous.
Third, consider your capitalization policies. Under 280E, businesses often made different decisions about what costs to capitalize versus expense. Your fixed asset records and depreciation schedules may need adjustment to reflect normal tax treatment once 280E no longer applies.
Fourth, evaluate your pricing strategy. Many cannabis operators built 280E tax costs into their pricing models. If your effective tax rate drops from 70% to 25%, you’ll have a significant margin to work with. Start analyzing whether to adjust prices, increase compensation, expand operations, or improve product quality.
The transition from 280E to normal taxation won’t happen automatically or cleanly. The IRS will need to provide guidance on how to handle partial-year changes, what happens to prior-year positions, and how various accounting methods should adjust. Businesses that start planning now will be positioned to capture maximum benefit while avoiding costly mistakes.
We need to model your tax impact under different scenarios. What would your effective rate be without 280E? How would that change your quarterly estimated payments? What entity structure would optimize your situation going forward? These aren’t questions to address after rescheduling happens—you need answers now so you can act decisively when the rules change.
Your books need a thorough review to ensure all expense categories are properly tracked and supportable. We should examine whether your current accounting method election remains optimal and whether any method changes should be requested. If you’ve been aggressive with any tax positions because you were already paying such high rates, we need to evaluate those positions in light of coming changes.
This is also the moment to address any deferred tax planning you’ve been postponing. Many cannabis operators have put off retirement plan implementation, fringe benefit programs, or entity restructuring because the 280E burden made other planning feel futile. That calculation is about to change dramatically.
Don’t wait for final rules to start planning. Schedule a comprehensive tax strategy session in the next two weeks. We need to review your current position, model scenarios, identify structural opportunities, and create an action plan that positions your business to benefit fully from rescheduling while managing the transition risks. The businesses that emerge strongest from this change will be those that prepared in advance, not those that scrambled to adapt after the fact.
Contact our office today to schedule your rescheduling impact analysis. This is your opportunity to fundamentally transform your business’s tax position—let’s make sure you’re ready to capture every available benefit.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
