Federal Tax Guidance for State-Licensed Medical Cannabis Companies Is Coming, Treasury Says

State-licensed medical cannabis operators could soon reduce their federal tax burden, as the U.S. Treasury Department and the Internal Revenue Service plan to issue guidance clarifying how Section 280E of the Internal Revenue Code applies to their businesses.

The agencies’ move follows a recent order from the Department of Justice to reschedule state-authorized medical cannabis from Schedule I to Schedule III under the Controlled Substances Act.

By removing Section 280E, rescheduling would allow eligible cannabis businesses to claim standard tax deductions and credits. Section 280E businesses trafficking in Schedule I or II controlled substances are not allowed to deduct ordinary business expenses.

Its removal would improve after-tax profitability, boost EBITDA margins, and increase free cash flow for licensed cannabis operators nationwide.

The guidance is also expected to set forth a transition rule under which, for purposes of section 280E, rescheduling is generally treated as applicable beginning in the taxable year that includes the effective date of the Final Order in its entirety, but solely with respect to activities that cease to involve Schedule I or II controlled substances by operation of the Final Order, the agencies’ said in a press release issued in April.

Following the formal publication of acting Attorney General Todd Blanche’s April rescheduling order, state-legal medical cannabis operators can now apply for DEA Schedule III registration. The Drug Enforcement Administration has launched an online portal for state-authorized businesses to register under the new framework, in anticipation of an administrative hearing before the DEA  scheduled for late June. The hearing will bring together regulators, experts, and opponents for the first formal review of cannabis scheduling in decades. They are expected to consider broader rescheduling of all “botanical cannabis,” including recreational cannabis, to Schedule III.

To that end, interested parties are expected to apply to participate in the hearings by May 24 and demonstrate they are directly affected by the proposed rule, according to the Talking Joints Memo.

Los Angeles attorney Sahar Ayinehsazian told IgniteIt that the hearing is meant to address the gap between the narrow, product‑specific rule and the broader question of cannabis as a substance.

“What folks are hoping comes out of the June 29 hearing is a blanket substance-specific rescheduling to Schedule III,” she said.

Other experts are more skeptical. Attorney Steven Schain, Of Counsel at Malkin Law, said the process is symbolic, as it addresses procedural requirements before agencies advance changes they have already embraced.

“Most deem the hearing as a pageant to ratify the findings and direction that the DEA and AG have already decided,” he noted.