After almost a year of stalled action, the Trump Administration is continuing, by Executive Order, the Biden Administration’s efforts to reclassify marijuana from a Schedule I drug to a Schedule III drug. Should regulations finalize this change (and there almost certainly will be bipartisan opposition), effective federal tax rates on income from state-legal marijuana businesses would plummet—and match the lower effective rates imposed on income from more mainstream businesses.

Some media reports have picked up on the tax angle to rescheduling—for the state-legal marijuana industry, it’s a big deal. But, as is typical in tax, there’s more to the story. If marijuana remains illegal at the federal level (as seems likely), rescheduling would cede one of the few regulatory levers that the federal government has over the state-legal marijuana industry. From this perspective, the tax stakes of rescheduling go beyond just dollars and cents.

Commentary and analysis below the fold.

Under current law, § 280E taxes state-level marijuana businesses on their gross income, rather than their net income. For example, consider a (corporate) business with $50,000 of gross (cash) income and $40,000 of otherwise deductible (cash) expenses. For most businesses, there would be $10,000 of taxable income, $2,100 of tax due at the statutory 21% rate, and $7,900 of after-tax profit. At present, § 280E disallows these expense deductions for state-legal marijuana businesses. The same numbers would yield $50,000 of taxable income, $10,500 of tax due, and an after-tax loss of $500—and an eye-popping effective tax rate of 105%. The bottom line: § 280E single-handedly puts incredible pressure on cash flows and profit margins for state-legal marijuana businesses.

It’s well-established that this explicitly punitive tax regime seriously impairs the ability of state-legal marijuana businesses to finance organic growth through retained earnings. Coupled with these businesses’ limited access to conventional capital markets, § 280E acts as a ratchet that reduces the industry’s rate of growth—not clearly a bad thing during the halcyon days of early state-level legalization. By increasing reliance on external (frequently private) financing, § 280E also may encourage closer third-party monitoring of these businesses, either through contract law or informally. Of course, if business operators self-finance or attract less-than-savory outside investors, this monitoring may have little substance. Section 280E does nothing to monitor the monitors. But there remains real potential for market discipline through § 280E’s indirect limitation on retained earnings, and rescheduling renounces this regulatory mechanism entirely.

State-legal marijuana businesses also have adopted intricate planning devices to mitigate their often-onerous federal tax burdens. For example, owner-operators may attempt to separate their business activities subject to § 280E’s disallowance rule from other activities not subject to § 280E, such as therapeutic services, merchandise sales, and real estate operations. Practitioners use audit experience and judicial opinions, favorable and unfavorable, to develop norms and guidance for making these distinctions. (The Tax Court, interestingly, is a major institutional player in this landscape.) There’s often a lot of legal infrastructure and ongoing oversight by lawyers and accountants—and, again, this type of monitoring might be good, even if not focused directly on, say, product access or potency. Rescheduling would not affect parallel state regulation of these businesses’ non-marijuana activities, but it would allow for greater variation across jurisdictions.

Less appealing are well-traveled mechanisms to increase state-legal marijuana businesses’ costs of goods sold. Under case law, gross income does not include the recoupment of COGS, which means that § 280E does not deny income reductions due to COGS. Predictably, some taxpayers have taken an aggressively expansionist approach to calculating COGS, and these efforts probably do little to increase meaningful oversight of the state-legal marijuana industry. From my perspective, this type of paper-shuffling is largely wasteful. The point, really, is that the Trump Administration’s renewed rescheduling efforts should be viewed as more than just tax relief. There are collateral regulatory implications that policymakers should engage directly as the rulemaking process moves forward.

Luke Broadwater & Ashley Southall, Trump Signs Order to Ease Restrictions on Marijuana, N.Y. Times (Dec. 18, 2025):

[D]rug policy experts said the most significant consequence would be financial relief for thousands of state-licensed businesses that paid some of the highest federal taxes in the nation. Because of the drug’s federal status, businesses that grow and sell cannabis, such as farms and dispensaries, are banned from taking common deductions for expenses like rent and payroll. . . .

“[Rescheduling] means higher profitability for businesses who are having to set aside huge amounts of money to meet their federal tax obligations,” said John Kagia, the policy director of the Office of Cannabis Management, the state agency overseeing New York’s medical, adult-use and hemp programs.

Mr. Kagia added that rescheduling the drug could also profoundly affect the stigma that has been attached to it over the last 55 years.

Sam Reisman, Trump Order Rallies Cannabis Industry, Advocates Want More, Law360 (Dec. 18, 2025):

Robert A. Mikos, a professor at Vanderbilt Law School who has studied the intersection of cannabis and federalism, told Law360, “I think rescheduling is now certain to happen, though the timeline remains murky. But rescheduling won’t change much, practically speaking.”

“It will provide a nice tax break for the marijuana industry, because the industry will no longer have to worry about Section 280E’s punitive tax accounting rules,” Mikos said. “But rescheduling will not legalize the sale of marijuana, even for medical purposes. Among other reasons, marijuana will remain an unapproved drug post-rescheduling . . . .”

Caitlyn Oprysko & Natalie Fertig, How The Cannabis Industry Leveraged a Big Win from Trump, Politico (Dec. 18, 2025):

The [rescheduling] effort included not only traditional levers of influence such as lobbying and political donations, but encompassed opinion polling and one-on-one conversations with friends of the famously sober president. . . .

The administration has come to treat the cannabis industry like other sectors, [said Kim] Rivers[, CEO of Florida’s largest medical marijuana company]—a triumph after long being viewed as taboo. She recalled a meeting earlier this year with representatives from a range of industries, including cannabis. Trump asked the same types of detailed questions to each sector, she said—there was no difference despite the illegality of cannabis at the federal level.