As widely reported, in April 2026, more than half a century after President Richard Nixon signed the 1970 Controlled Substances Act (CSA), medical marijuana alone (not recreational marijuana) was reclassified.
Medical marijuana became a Schedule III substance when then-Acting Attorney General (AG) Todd Blanche signed a 31-page order changing the federal status of medical marijuana. Reclassification opponents filed a lawsuit to stop medical marijuana’s change in schedule, but that challenge was rebuffed this week in federal court.
As a result, medical marijuana moved from a Schedule I federally prohibited drug (like heroin and LSD) to a Schedule III federally regulated drug (in the same category as ketamine and testosterone). However, the identical substance – used recreationally – remains Schedule I, defined as substances with high abuse potential, no currently accepted medical use, and lack of accepted safety under medical supervision. 21 U.S.C. § 812(b)(1).
This summer, the Drug Enforcement Administration (DEA) held an administrative hearing to determine whether recreational marijuana should become a Schedule III regulated substance; however, no decision has been issued, so recreational marijuana remains federally illegal.
A DEA administrative rescheduling hearing for recreational marijuana was held over several days from June 29 through July 15, 2026. In total, 14 people testified, including two for rescheduling and 12 individuals from seven entities opposed to rescheduling. As of publication, on Sept. 11, 2026, no decision has yet been made by the DEA on whether recreational marijuana will be rescheduled.
After the DEA hearing’s conclusion, the DEA judge ordered that corrections be made to the transcript of the proceedings. With no decision in the offing, throughout America (to include the five inhabited territories of Puerto Rico, U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands, home to some 4 million inhabitants), recreational marijuana is still a federally illegal substance under Schedule I. It remains an illicit substance, just like other drugs in Schedule I, including heroin, LSD, and peyote.
Before the AG’s April order, all marijuana businesses (even those with state-issued licenses) were violating federal law. The federal criminal exposure included charges of unlawful possession (21 U.S.C. §844), possession with intent to distribute (21 U.S.C. §841), and money laundering involving proceeds of unlawful activity (18 U.S.C. §§1956, 1957), to name a few.
But after the AG’s order, it can be argued, at a minimum, that those businesses selling state-licensed medical marijuana who registered with the DEA within the 60-day window are no longer engaged in federally illegal activity.
The DEA's 60-day expedited registration process, which ended on June 22, 2026, allowed entities holding state medical licenses to manufacture, distribute, or dispense marijuana for medical purposes under federal law.
For many operators, the decision to register with the DEA was part of a broader compliance analysis, in which consultation with both legal and tax professionals was essential. This was a complex decision, due in part, because federal registrants had to disclose whether they were involved in the sale of adult recreational marijuana, which, under federal law, remains illegal. Registrants who sell both products were compelled to admit in the registration form on the DEA’s e-portal to ongoing criminality and risk potential federal criminal exposure for such admissions to criminality.
The DEA has not disclosed how many state-legal marijuana businesses applied to become federally registered medical marijuana operators.
The total number of businesses that applied to the DEA to become medical marijuana registrants has not yet been officially announced. Searching on the DEA’s registration website results in the notice “No Registrant Population by State and Business Activity Data Found,” and no totals are given.
Gathering numbers is also difficult, as the DEA accepted applications after the 60-day deadline, with those applying late not being considered under the expedited process. There has been no clarification either from the DEA about how those filed within the 60 days and those after the 60 days will be treated.
There is a dearth of information about what is happening with purveyor-registrants. The AG’s order stated that state-licensed medical marijuana businesses would qualify for federal registration but did not define what constitutes state-licensed medical marijuana businesses.
Some states maintain severely limited-access (SLA) medical regimes such as those in South Carolina, and North Carolina’s intractable epilepsy low-THC program and tribal dispensary model. It is unclear whether such programs qualify for federal registration. Likewise, questions remain about the inhabited U.S. territories which have varying medical or recreational (or combination) regimes.
It is an open question whether federal tax relief for medical marijuana businesses (i) will be applicable to non-registrants, (ii) will be retroactive, and, if so, (iii) what retroactivity will mean.
The AG’s order is effective April 22, 2026. Treasury indicated in April 2026, a week after the AG's order, that tax guidance would be forthcoming. To date, none has been issued.
Section 280E of the Internal Revenue Code (IRC), in effect since 1982, has prevented those involved in federally illegal criminal activity from deducting ordinary and necessary expenses on federal tax returns. This has applied even to state-legal marijuana operators on their federal tax returns. As a consequence, marijuana businesses have typically been limited to deducting just the cost of goods sold (COGS). (This has made cultivation somewhat more favorable than distribution or retail, given the ability to allocate production costs into inventory.)
To date, the IRS has consistently taken a strict approach to disallowing attempts to expand COGS or recharacterize operating expenses, and the Tax Court has largely upheld this position.
It could be that at some point, Treasury will adopt transition rules for medical marijuana operators, potentially applying relief to the first full taxable year including the effective date. This suggests 2026 may be treated as a transitional year for some taxpayers, though details remain quite unclear.
As of now, in September 2026, there remains uncertainty about whether §280E relief applies automatically or only to those who applied to the DEA in the 60-day period. Whether the favorable tax relief is applicable to non-registrants is also an open question. So too is how an operator who sells both medical and recreational could apportion the businesses for federal tax purposes.
While the AG's April order also encourages the Treasury Secretary to consider retroactive relief from §280E for prior taxable years involving state-licensed medical marijuana businesses, there has been no stated policy change. However, statutory limitations may constrain how far such relief can reach. Refund claims generally must be filed within three years of filing or two years of payment under IRC §6511, and must be properly substantiated under Treasury regulations.
Taxpayers sometimes use protective claims to preserve refund rights while legal uncertainty is resolved. The Supreme Court’s decision in Kales v. United States, 314 U.S. 186 (1941) supports the concept that a timely written claim can preserve limitations periods. However, the IRS has historically resisted cannabis-related refund claims, and recent litigation has continued to treat marijuana as a Schedule I substance for tax purposes, including in New Mexico Top Organics v. Commissioner (“the New Mexico case”), Docket No. 19661-24.
Though the case is still pending, the IRS's position (in a March 6, 2026, filing) remains contrary to taxpayers who attempted to benefit from the DEA’s administrative reclassification of marijuana as a Schedule III substance.
With the federal government failing to provide guidance on a host of issues, it’s chaos and uncertainty for marijuana operators.
We are now in a chaotic and uncertain transitional legal and tax environment in which medical and recreational are treated differently under federal law despite being the same substance. The treatment is different for criminal purposes as well as tax computation analysis.
Best bet for operators? Two things: First, hire seasoned lawyers who do more than just licensing – hire those with experience in administrative law and criminal law. Sometimes reliance on legal advice can preclude or reduce criminal exposure to certain federal crimes.
Second, retain tax professionals who have Tax Court experience with cannabis cases, who have had previous experience with analyzing the application of §280E and who have consulted previously with attorneys who practice federal criminal law.
The legalization arena is progressing, but minefields abound. Operators should cloak themselves in the guidance of tax and legal professionals. So, if the feds come gunning, the operator will be well prepared to successfully defend.
