Department of Justice, Drug Enforcement Administration, 21 C.F.R. Parts 1300, 1301, 1308, 1312, Docket No. DEA-XXXX, Attorney General Order XXXX-XXXX, Schedules of Controlled Substances: Rescheduling of Food and Drug Administration Approved Products Containing Marijuana and Products Containing Marijuana Subject to a Qualifying State-issued License From Schedule I to Schedule III; Corresponding Change to Permit Requirements (effective Apr. 22, 2026).

For tax professionals advising clients in the cannabis industry or individual taxpayers with substantial medical expenses, the April 22, 2026, final order by the Drug Enforcement Administration (DEA) represents a seismic shift in the application of federal tax law. By transferring specific marijuana products from Schedule I to Schedule III of the Controlled Substances Act (CSA), the order bifurcates the tax treatment of state-legal marijuana businesses and opens new avenues for individual medical deductions.

This article examines the technical application of I.R.C. § 280E and I.R.C. § 213 following this final order.

Impact on I.R.C. § 280E for State-Licensed Marijuana Businesses

State-Licensed Medical Marijuana Facilities

Historically, all cannabis operations have been severely penalized under I.R.C. § 280E, which 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 or the law of any State in which such trade or business is conducted."

The DEA's final order specifically places into Schedule III "marijuana as defined in the CSA... to the extent that any of these are included in an FDA-approved drug product or are subject to a state-issued license to manufacture, distribute, and/or dispense marijuana or products containing marijuana for medical purposes."

Because I.R.C. § 280E strictly targets businesses trafficking in Schedule I or II substances, the DEA order formally acknowledges the resulting tax relief for medical dispensaries. The text of the order directly affirms that "as a consequence of this rule, state licensees will no longer be subject to the deduction disallowance imposed by Section 280E of the Internal Revenue Code, which applies only to businesses engaged in 'trafficking in controlled substances . . . in a schedule I or II,' 26 U.S.C. § 280E."

Furthermore, the Administrator notes that they encourage "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." However, practitioners should proceed with caution and await further IRS guidance, as the DOJ includes a standard disclaimer: "Nothing in this rule constitutes a determination regarding federal tax liability, and state licensees should consult with tax counsel regarding the applicability of Section 280E to their specific circumstances."

State-Legal Recreational Marijuana Facilities

Crucially, the Schedule III reclassification is narrow. For state-legal adult-use (recreational) marijuana businesses, the deduction bar under I.R.C. § 280E remains fully in effect.

The DOJ order explicitly dictates that "any form of marijuana other than in an FDA-approved drug product or marijuana subject to a state medical marijuana license remains a schedule I controlled substance, and those who handle such material remain subject to the regulatory controls, and administrative, civil, and criminal sanctions, applicable to schedule I controlled substances." Therefore, because recreational marijuana retains its Schedule I status under 21 U.S.C. § 812, businesses trafficking in adult-use cannabis cannot claim standard trade or business deductions under I.R.C. § 162 and are still restricted exclusively to calculating cost of goods sold (COGS).

Individual Deductibility of Medical Marijuana Expenses (I.R.C. § 213)

Deductibility of State-Licensed Medical Marijuana

For individual taxpayers, I.R.C. § 213(a) provides an itemized deduction for expenses paid for "medical care." Under I.R.C. § 213(b) and § 213(d)(3), a drug is only considered a deductible medical expense if it "requires a prescription of a physician for its use." Furthermore, Treas. Reg. § 1.213-1(e)(2) restricts this to items that are "legally procured," and Treas. Reg. § 1.213-1(e)(1)(ii) prohibits deductions for "illegal operations or treatments."

Under Rev. Rul. 97-9, 1997-1 C.B. 77, the IRS previously disallowed all medical deductions for marijuana—even if acquired on a physician's recommendation in a state-legal framework—because its Schedule I status meant possession violated federal law, and therefore it was not "legally procured."

With state-licensed medical marijuana now residing in Schedule III, it has a federally accepted medical use, and its authorized possession and distribution no longer violate the CSA. This effectively renders the legal foundation of Rev. Rul. 97-9 moot. Taxpayers can now theoretically satisfy the "legally procured" hurdle.

However, practitioners must ensure clients satisfy the prescription requirement. To be deductible on Schedule A, the Schedule III medical marijuana must be obtained pursuant to a formal prescription, meeting the strict definition of I.R.C. § 213(d)(3). If the patient's state medical marijuana framework and documentation satisfy this federal prescription definition, the amounts paid should qualify as deductible medical care expenses.

Deductibility of State-Legal Recreational Marijuana

If a taxpayer purchases state-legal recreational marijuana to self-medicate without a prescription, these costs remain strictly non-deductible.

First, because adult-use marijuana is excluded from the DEA's Schedule III final order, it remains a Schedule I controlled substance. Consequently, Rev. Rul. 97-9 still governs these transactions; the purchase violates federal law and constitutes an "illegal treatment" under Treas. Reg. § 1.213-1(e)(1)(ii), failing the "legally procured" test.

Second, I.R.C. § 213(b) strictly requires a deductible drug to be a "prescribed drug". Since recreational marijuana is acquired over-the-counter without a physician's prescription, it categorically fails to meet the definition of a prescribed drug under I.R.C. § 213(d)(3) and cannot be deducted on Schedule A.

Conclusion

The DOJ's April 2026 order requires tax practitioners to carefully segregate medical and recreational cannabis activities. State-licensed medical marijuana operations are liberated from the punitive constraints of I.R.C. § 280E, and patients acquiring medical marijuana via prescription may now find a path to a Schedule A medical deduction. However, businesses and individuals transacting in the recreational cannabis market will find their federal tax treatment entirely unchanged.

Prepared with assistance from NotebookLM.