Executive Order to Reschedule Cannabis: What It Means for IRC 280E

On December 18, 2025, President Trump issued an Executive Order directing the Department of Justice (DOJ) to expedite the rescheduling of cannabis to Schedule III under the Controlled Substances Act (CSA). This action follows the Department of Health and Human Services’ (HHS) 2023 recommendation and represents a major turning point for state-legal cannabis businesses.

Why Rescheduling Matters for IRC 280E

Currently, IRC 280E disallows deductions for businesses trafficking in substances classified under Schedule I or II of the CSA. Cannabis has long been in Schedule I, creating significant tax burdens for operators. Once DOJ finalizes the rule—expected in the first half of 2026—cannabis will move to Schedule III, removing it from the scope of IRC 280E. This means cannabis businesses will no longer be subject to 280E’s harsh tax limitations going forward.

In addition to the long-awaited removal of IRC 280E, rescheduling cannabis from Schedule I to Schedule III also opens the door for federal research, removes the presumption that cannabis has no accepted medical use, and reduces many of the regulatory barriers that have severely limited scientific study up to this point. This change would allow researchers easier access to research-grade cannabis, expand eligibility for federal grants, and support more rigorous, large-scale studies on medical efficacy, safety, and public health impacts.

What Cannabis Operators Should Do Now

• Timing & Uncertainty: Rescheduling is not effective until the final rule is adopted and may face legal challenges. Businesses should maintain strong compliance and disclosure strategies during this transition.
• Stronger Position: Rescheduling strengthens the statutory argument that IRC 280E no longer applies, shifting the legal debate from Schedule I status to Schedule III.
  • Estimate Future Tax Savings: Calculate how much lower your federal tax liability will be when normal deductions (rent, payroll, marketing, etc.) become allowable.
  • Cash Flow Projections: Update forecasts to reflect increased after-tax cash flow.
  • Scenario Planning: Compare different timelines (e.g., rescheduling effective mid-2026 vs. delayed) and their impact on your financials.
  • Reinvestment Strategies: Decide how to use the freed-up cash—expanding operations, paying down debt, investing in technology, or building reserves.
• Settlement Potential: Once rescheduling occurs, the IRS may be more open to resolving past disputes since the issue becomes non-continuing. Operators should review any open IRS audits or appeals to identify unresolved 280E-related matters, engage tax counsel early to develop settlement strategies and documentation, quantify potential liabilities against likely settlement ranges, maintain reasonable basis documentation to strengthen prior-year positions, and monitor timing since settlement discussions may become more favorable after the final rescheduling rule is adopted.

This is exciting news for the industry. This means cannabis businesses will no longer be subject to 280E’s harsh tax limitations going forward, and will finally be able to account for standard deductions.

Federal Cannabis Policy Developments to Watch

While the elimination of IRC 280E is the headline, cannabis operators should also monitor emerging federal initiatives around CBD access, research funding, and potential changes to hemp regulations. These developments could reshape compliance and growth strategies in the months ahead.

How AAFCPAs Helps Cannabis Operators

Since 2012, AAFCPAs has been a strategic advisor to cannabis operators nationwide, delivering tax, audit, advisory, and outsourced accounting/CFO solutions. Our multi-disciplinary team—CPAs, consulting CFOs, tax attorneys, wealth advisors, and risk specialists—partners with businesses at every stage, from licensing to exit, and cultivation to retail. We help clients optimize cash flow, manage multi-state tax obligations, and design strategies for growth, succession, or exit. In a post-280E world, we’re here to help you navigate complexity and seize opportunity.

These insights were contributed by David McManus, CPA, CGMA, Tax Partner & National Cannabis Practice Leader as well as Janice O’Reilly, CPA, CGMA and Ronald C. Lipof, Partners, Transaction Advisory & Cannabis Services.

Questions? Reach out to our authors directly or your AAFCPAs partner.

AAFCPAs offers a wealth of resources for the cannabis industry.