A significant development in federal drug policy occurred on December 18, 2025, with the issuance of a new Executive Order prioritizing the rescheduling of marijuana. For CPAs with clients in the state-legal cannabis sector, this action signals a potential and expeditious end to the onerous tax burdens imposed by Internal Revenue Code (IRC) Section 280E.

This article details the new Executive Order, reviews the proposed rule it addresses, and analyzes the technical tax implications regarding Schedule I status and the deductibility of business expenses.

The Executive Order: A Mandate for Speed

On December 18, 2025, President Donald J. Trump issued an Executive Order titled "Increasing Medical Marijuana and Cannabidiol Research". While the order addresses research infrastructure and hemp-derived products, its immediate relevance to the tax profession lies in its directive regarding the Controlled Substances Act (CSA).

The Order notes that in May 2024, the Department of Justice (DOJ) issued a proposed rule to transfer marijuana from Schedule I to Schedule III. This rulemaking process, having received nearly 43,000 public comments, is currently "awaiting an administrative law hearing".

To accelerate this process, Section 2(a) of the Executive Order explicitly directs the Attorney General to "take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law".

Context: The 2024 Proposed Rule

The rulemaking referenced in the Executive Order originated on May 16, 2024, when the DOJ and Drug Enforcement Administration (DEA) issued a Notice of Proposed Rulemaking (NPRM) to transfer marijuana from Schedule I to Schedule III of the CSA.

This proposal was based on a recommendation from the Department of Health and Human Services (HHS), which determined that marijuana has a "currently accepted medical use" (CAMU) in the United States for conditions including anorexia, nausea, and pain. Furthermore, HHS found that marijuana has a potential for abuse less than that of drugs in Schedules I and II and a moderate to low level of physical dependence.

Under the proposed rule, marijuana would remain a controlled substance, subject to applicable criminal prohibitions and the Federal Food, Drug, and Cosmetic Act. However, the shift from Schedule I to Schedule III is the critical factor for federal income taxation.

The Current Tax Burden: IRC Section 280E

For decades, state-legal cannabis operators have faced effective tax rates that can exceed 70% due to IRC Section 280E. Enacted to preventing drug traffickers from claiming tax deductions, the statute states:

"No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law...".

Because marijuana has historically been classified as a Schedule I substance, compliant state-licensed businesses are barred from deducting ordinary and necessary business expenses, such as rent, wages, and marketing. These businesses are generally limited to deducting only the Cost of Goods Sold (COGS).

Rescheduling and the Removal of the 280E Bar

The rescheduling of marijuana to Schedule III would render IRC Section 280E inapplicable to cannabis businesses.

The DOJ’s 2024 proposed rule explicitly acknowledges this economic impact. The Regulatory Flexibility Act analysis within the NPRM states: "Section 280E of the Internal Revenue Code bars businesses from claiming tax deductions... (within the meaning of schedule I and II of the Controlled Substances Act). If marijuana is ultimately transferred to schedule III, section 280E would no longer serve as a statutory bar to claiming deductions for those expenses".

Conclusion for Tax Practitioners

The President’s December 18 directive to the Attorney General to finalize the rule "in the most expeditious manner" suggests that the administrative law hearing and subsequent finalization may be prioritized in the immediate future.

CPAs should prepare for the following potential outcomes:

Restoration of Deductions: Upon the finalization of the rule transferring marijuana to Schedule III, Section 280E will cease to apply, allowing cannabis clients to deduct standard business expenses under IRC Section 162. Note that it’s clear exactly when Section 280E’s bar on deductions would cease to apply. The IRS is expected to make its position know once the actual rescheduling takes place.
Economic Impact: The DOJ acknowledges that this action may have "unique economic impacts" and "large impacts related to Federal taxes".

Tax professionals are advised to monitor the Federal Register for the scheduling of the administrative law hearing and the subsequent issuance of the Final Rule to properly advise clients on tax planning and estimated payments for the upcoming fiscal year.

Prepared with assistance from NotebookLM.