On April 22, 2026, Acting Attorney General (AAG) Todd Blanche, who took over from fired Attorney General Pam Bondi on April 2, signed a 33-page order[1] changing the federal status of medical marijuana. On a single day, after over half a century since President Richard Nixon signed into law the 1970 Controlled Substances Act (CSA), medical marijuana alone (not recreational marijuana) changed its CSA classification status.
Never before in the history of U.S. drug classification has a single substance been “bifurcated” into two categories of the drug scheduling table of 21 United States Code § 812(a).
As a result of the AAG’s order, medical marijuana was transformed from a Schedule I federally forbidden drug, like heroin and LSD, to a Schedule III federally regulated drug (in the same category as Ketamine and Testosterone). However, the identical substance but used recreationally remains a Schedule I drug, at least until the conclusion of the DEA’s administrative drug reclassification hearings, set to begin on June 29, 2026.
See the Five CSA Classification Schedules Chart, effective April 22, 2026, below.
Today, recreational marijuana (like all marijuana since 1970), as a Schedule I substance, is federally considered to be a (i) drug that has a high potential for abuse, (ii) which has no currently accepted medical use, and (iii) for which there is no accepted safe usage under medical supervision, under 21 United States Code Section 812(b)(1).
In contrast, per the AAG’s order, if marijuana is regulated by “a state medical marijuana license” (AAG order, page 14), the same substance is now placed on Schedule III.
Schedule III’s statutory factors (as recited in 21 United States Code § 812(b)(3)) are that:
(A) the substance has a potential for abuse less than drugs in schedules I and II, with Schedule I still including recreational marijuana, LSD and heroin, and Schedule II including drugs like cocaine, oxycodone and fentanyl. 21 United States Code § 812(b)(3)(A);
(B) the substance has a currently accepted medical use in treatment in the U.S.; and
(C) abuse of the drug may lead to moderate or low physical dependence or high psychological dependence.
The new Schedule III classification applies not just to state-licensed medical marijuana businesses (a term not precisely defined in the AAG’s order), but to FDA-approved products containing non-synthetic marijuana. There is only one such FDA-approved product containing derivatives of the cannabis sativa plant (not synthetically manufactured), and that is Epidiolex.
That medication contains CBD, a chemical component of marijuana, and was first approved in 2018, as a Schedule V substance, to treat epilepsy and other seizure disorders. The medication’s use was expanded to treat other related syndromes and to include use by infant patients, and in 2020, the federal government removed the medication entirely from the five categories of drug classification.
As a result of the removal of Epidiolex from the five-category CSA drug schedule, the substance was no longer subject to DEA monitoring and tracking. Because the AAG’s order directs that FDA-approved products containing marijuana are designated as Schedule III, the scheduling status of the sole-FDA approved medication with plant-derived marijuana remains an open question.
AAG’s Order Urges Businesses to Register With DEA
The April 2026 AAG’s order, at page 2, establishes “an expedited registration process … for entities holding state medical licenses enabling [them] to engage in the manufacture, distribution and/or dispensing of marijuana for medical purposes under federal law.”
But state licensure or completion of the federal registration process does not automatically equate to or result in the Department of Justice’s (DOJ) permission to engage in a “federally approved” marijuana business. While those holding state medical marijuana licenses may submit their existing state licensing credentials as “conclusive evidence of state-law authorization,” the DEA administrator, currently Terrance Cole, becomes the ultimate “decider” on whether to grant or deny federal DEA registration.
The AAG uses a curious turn of phrase to explain how the federal government will view state-licensed systems. The AAG states, on page 21, that his order will “leverage” state regulatory structures. Leverage is commonly defined as having or taking control, or holding the advantage in a situation or having a stronger position in a contest, physical or otherwise.
The AAG justifies this federal “leveraging” of state regulatory systems on two expansive grounds: (i) to “ensure compliance” with [a specific, multilateral, international drug treaty from 1961], the Single Convention, while (ii) “preserving [the DEA’s] authority to deny or revoke registration” for “specific-public interest concerns.” (AAG order, page 21)
Translation? Becoming a part of the new federal “registration pathway” (AAG order, page 21) cedes tremendous authority to federal authorities. The DEA’s discretionary denial doorway (DDDD) is extensive. Federal approval can be denied if the DEA finds that granting a state-licensed business federal (DEA) registration is “inconsistent with the public interest” or inconsistent with drug treaty requirements.
The two stated avenues for the DDDD are: (i) “public interest” and (ii) Single Convention (aka drug treaty) compliance. These justifications easily swallow up the whole.
DEA Alone Decides Public Interest Factors
The public interest registration denial factors (as defined in 18 United States Code § 823 for manufacturers in subsection (a) and in subsection (b) for distributors) are quite broad.
The DEA can deny registration, in the public interest, for both distributors and manufacturers, on grounds that the DEA believes that:
(1) the business unlawfully distributes (in legal language, meaning that the business does not have “effective controls against diversion,” aka illegal distribution);
(2) if the DEA finds that the business is not in compliance with state and local law;
(3) if the registrant (the person applying) has a criminal conviction under state or federal law for drug offenses, or if the entity employs or is owned by someone with a drug conviction;
(4) if the DEA is concerned about the registrant’s previous or current practices related to preventing unlawful distribution; or
(5) any other factors that the DEA deems “relevant to and consistent with the public health and safety.”
Since 1970, the federal government has consistently criminalized both recreational and medical marijuana, and has repeatedly prosecuted medical users who have been compliant with the state-legal medical rules in their legalized states, as discussed in Gonzales v. Raich, 545 U.S. 1 (2005) and United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016). Federal officials, despite recent presidential statements to the contrary, have used “public safety” concerns to justify increasing federal marijuana possession arrests and denying Second Amendment gun rights to users of marijuana.
For example, on Nov. 13, 2025, Wyoming’s U.S. Attorney Darin Smith announced a new federal “tough on marijuana” possession policy, explaining that the Trump administration believes that marijuana is a public safety hazard and that the detrimental effects of drugs on our society are undeniable.
The current administration took a similar position against marijuana use on March 2, 2026, during a U.S. Supreme Court argument in United States v. Hemani. The question before the high court is whether a marijuana user (not a felon and not someone convicted of a drug offense) can possess a firearm.
Under federal law, 18 U.S.C. § 922(g)(3), it is unlawful for anyone “who is an unlawful user of … any controlled substance” to possess a firearm. At the March 2026 U.S. Supreme Court proceeding, President Donald Trump’s solicitor general argued that a habitual marijuana user (like a habitual drunkard) should be denied access. (Supreme Court, Hemani oral argument, transcript page 5).
And even after the AAG’s April 22, 2026, rescheduling order, the federal government’s lawyer informed the high court, in writing, on April 23, 2026, that the federal government’s position on the case had not changed, and that someone who admits to “regular use” of marijuana should be barred from owning a firearm.
The solicitor general’s current position is an indication of how marijuana and marijuana users are viewed by the top legal minds of the federal government. Gun possession can be denied to a marijuana user, to this day, because “marijuana … remain[s] a Schedule I controlled substance because it was neither incorporated into an FDA-approved drug product nor covered by a state medical marijuana license.”
The federal government’s actions and pronouncements demonstrate that a wide range of conduct, thought to be considered federally acceptable after the AAG’s April 2026 order, can be characterized by the DEA or any other arm of the federal government as something against or implicating “the public interest.”
DEA Alone Determines Treaty (Single Convention) Compliance
The other avenue of the DEA’s discretionary denial doorway (DDDD) is on the grounds of treaty compliance. As discussed on page 7 of the AAG’s order, parties to international agreements “are obligated to take various control measures related to drugs that are covered by the treaty.”
Treaties, conventions and protocols (all types of international agreements, hereinafter referred to as treaties) are norm-based agreements among or between countries under the authority of the United Nations. They are unenforceable even though country-signatories are “required” by the U.N. to comply and to integrate the provisions of the agreement into each of the countries’ domestic laws.
The Single Convention of the United Nations (U.N.) is a 1961 multilateral drug treaty with over 150 signatory countries, including the United States, which signed on after Senate ratification in 1967. The signatory nations agree, among many things, to (i) limit (put quotas on) and control (be in charge of and regulate) narcotics and (ii) to cooperate in combating illicit drug trafficking.
The Single Convention, as interpreted by the International Narcotics Control Board (INCB), the monitoring body for the implementation of the United Nations international drug control treaties, requires ultimate federal control of the distribution of cannabis and strict adherence to the treaty’s terms “as written.”
On the long list of the Single Convention’s drugs to be “controlled” by the signatory countries is cannabis. The convention (and its 1971 amending protocol) directs the signatory nations to “adopt such measures as may be necessary to prevent the misuse of, and illicit traffic in, the leaves of the cannabis plant.”
Since signing onto the original 1961 Convention through April 22, 2026, the effective date of the AAG’s order, the United States has kept marijuana on the CSA’s Schedule I as the treaty requires.
While there is a discrete statement in the convention’s preamble concerning all the “narcotic drugs” on the convention’s list, and that medical use of narcotic drugs … is indispensable for the relief of pain and suffering [and that] “adequate provision” should be made for narcotic drugs to be available for such purposes, the treaty singles out that narcotics addition as a “serious evil” causing “social and economic danger to mankind” and that the parties have a duty to “combat this evil,” with “coordinated and universal action.” (Single Convention, Preamble page 12)
There is no carve-out for medical marijuana in the convention or the amending protocol.
When Uruguay in 2013 became the first country in the world to legalize both medical and recreational marijuana, which is sold in the country’s pharmacies, that country, a signatory on the convention, was out of compliance with the convention. Ditto, convention signatory Canada, which legalized medical use in 2001 and adult recreational use in 2018, was also out of compliance.
The same can be said about the United States. While it placed marijuana on the CSA’s Schedule I in 1970 as dictated by the Single Convention, America has been out of compliance, arguably, since as early as 1996, when California became the first state to legalize medical marijuana, and thereafter, and continuing to the present, to include since 2012, when Colorado and Washington, on the same day, became the first U.S. states to legalize adult recreational marijuana.
Compliance by the United States would have been to federally suppress all state-legalization regimes, as the treaty views them as trafficking. Except for federal prosecution of users (21 United States Code § 844) and traffickers (21 United States Code § 841), the federal government has ceded “control” (to be charge of) the manufacture and distribution of marijuana to the states, at least up until April 22, 2026.
As a Brooklyn Law School Journal noted in 2021, there have been many country signatories violating the Single Convention and the subsequent drug treaties. Despite the global rise of legalization (both medical and recreational) and a 2018 World Health Organization (WHO) report on the therapeutic value of cannabis urging rescheduling of marijuana in the Single Convention, the substance, under the convention and its amendments, is still considered an illicit drug.
The AAG’s order at page 8, footnote 16, anchors the justification of the April 2026 rescheduling of medical marijuana as treaty compliance by relying on a Biden-era 2024 Office of Legal Counsel memo. The Biden memo was in support of that administration’s attempt to reschedule medical marijuana via administrative rulemaking, which the DEA rejected after the November 2024 election, as discussed in Cannabis Business Times, dated Feb. 6, 2026. Yet, the administration has not chosen administrative rulemaking for medical marijuana. It’s left that just for adult recreational marijuana, with the DEA administrative hearings to begin in June 2026.
Why the different treatment given that Article 33 of the convention states that parties “shall not permit the possession of drugs except under legal authority,” and neither medical nor adult recreational use is legal under the convention?
It is possible to view this Schedule III rescheduling of medical marijuana as a toehold in federal control of the industry. It can be viewed as an opportunity for the federal government to be in charge of or direct medical marijuana businesses, starting with the medical industry.
Consider a slide entitled “Types of Control” from a DOJ 2025 presentation on federal compliance with the Single Convention (U.N. Reporting and Question Section, Diversion Control Division, April 2025).
Treaty compliance puts the federal government at the helm, with, under a strict interpretation of the convention, the DEA becoming the “competent authority” controlling all marijuana distribution. This would make state-licensed operators “middlemen” to federal control.
Additionally, international law, including the 1961 Convention as amended, requires not just that the federal government controls the manufacture and distribution of America’s marijuana, but also that the federal government is authorized to set quotas, create systems for “importations and exportations of products containing marijuana,” require federally-crafted recordkeeping, as well as being able to mandate federally approved security protocols. Plus, as the DEA has always maintained the investigatory authority to inspect marijuana operations, this authority would become even more powerful (and arguably more onerous) when the DEA sets the rules for its federal marijuana registrants.
Treaty compliance and “public interest” are DDDDs, avenues that can be easily leveraged by the federal government. The parameters as to exactly what becoming a federal marijuana Schedule III registrant means remain woefully unclear.
The DEA’s Registration Portal for Medical Marijuana Businesses
Shortly after the AAG’s order, the DEA uploaded to its government website four pages of registration instructions for state-legal medical marijuana stakeholders (identified in the instructions only as “medical marijuana dispensaries”). The DEA registration directions are entitled, “Instructions for Medical Marijuana Dispensary Application Submission" [to the DEA].
Disclosures Required in the DEA Portal
The DEA has directed that state-licensed medical marijuana dispensaries register with the DEA through the DEA’s online electronic registration portal. The DEA portal contains an introductory warning stating that: Providing false information may result in penalties.
The DEA instructions also recite several substantive steps regarding disclosures of information to be made to the DEA, along with the requirement that the federal registrant pay an application fee. (See graphic of the DEA Portal 8 Application Tabs/Fields, below.)
The DEA portal asks for the following information:
(i) business identity and email address
(ii) declaration as to whether the applicant is “handling or dispensing” medical or recreational marijuana
(iii) the applicant’s state-issued license number and expiration date
(iv) disclosure of the applicant’s criminal background and criminal convictions
(v) disclosure of operating procedures, from recordkeeping to packaging, labeling, storage, inventory control and security protocol, and the like, as well as identification of those having access to the product.
The portal also contains payment instructions for a nonrefundable $794 application fee. The portal also directs the registration applicant to confirm the information’s accuracy and states that a DEA email confirmation of receipt will be sent to the applicant after submission.
Screenshots of Information Requested by the DEA Portal
A. DEA Portal, Tab 2, asks registrants about involvement in both medical and adult recreational marijuana businesses.
B. DEA Portal, Tab 4, asks background questions under a section called “Liabilities.” The registrant must make criminal activity disclosures, including providing information about drug convictions, which could preclude federal registration on “public safety” grounds.
With all of the uncertainty prompted by the AAG’s order, and the lack of information about how federal agencies, including the DEA, will implement the AAG’s order, and all the conflicting, tea-leaf-reading by those with and those without federal government experience in prosecution, taxation and international law, what is a marijuana operator in the United States to do at this pivotal moment?
Answer: Read the AAG’s order, discover what is being asked for in the DEA portal, and consult with experienced legal and taxation experts to plan next steps.
Let’s do both, starting with a former federal prosecutor’s perspective.
Former Federal Prosecutor Urges Caution Before Completing DEA Registration
From a former federal prosecutor’s perspective, completing the DEA registration portal is rife with issues, especially for those in combo (adult recreational/medical) and or those with social equity licenses.
To name a few: Applicants must disclose whether they are involved in the adult recreational industry, which remains a federally illegal criminal activity subject to federal prosecution. Applicants must disclose criminal drug convictions, which may have been permissible for state licensure but will likely not be for federal registration. (Consider the government’s position in the gun case, Hemani, (discussed above) that after the issuance of the AAG’s order, even regular usage of marijuana (not even resulting in a criminal conviction) justifies the denial of constitutional rights for the user.
Most significantly, what happens to state-licensed marijuana businesses involved in both medical and recreational activities? Twenty-four states have laws permitting adult recreational use and robust medical marijuana programs, and some 15 states (with exceptions noted) have solely medical licensing systems. See the Werner-Simon Degrees of Legalization Chart below.
*Note re Legalization Map: Although Texas, on June 20, 2025, expanded its severely-limited access program, from permitting only 1% THC by weight to increasing that to 10 milligrams per dosage, since no package can exceed 1 gram of THC, Texas' toe-tip into medical acceptance is not considered by the authors to be robust enough to constitute full-fledged medical legalization.
Additionally, on May 12, 2026, Georgia’s governor signed a medical marijuana bill into law, which, although it expands medical use from individuals with intractable end-stage conditions to an array of medical conditions regardless of an end-stage diagnosis, it limits the THC dosage a patient can possess at any time. That state’s rollout will determine if Georgia’s constitutes robust medical access.
Marijuana businesses in an exclusively medical state, like Pennsylvania, would have an easier time completing the portal, because all of the activity and all of the licenses (except for a testing lab) include cultivation and manufacturing, requiring a grower/processor permit from the Pennsylvania Department of Health.
Contrast this with California, a combo-adult recreational and medical state, which issues licenses for marijuana testing, cultivation, distribution, manufacturing, event use and retail.
In California, M licensees (medical) and A licensees (adult recreational), across all license categories, in the same “licensed” physical space, so long as they hold the proper licenses. Which part of the operation, in the same space, would constitute medical – would be an open question.
Talk with legal counsel about the decision to federally register and about how to complete the form.
But deciding whether to become a registrant is not the only issue for those in state-legal industries; with or without registration, it is imperative that those in the industry seek guidance from tax professionals experienced in cannabis taxation issues.
Guidance From a Tax Professional in Light of the AAG’s Order
Internal Revenue Code § IRC 280E
The AAG’s order, at page 17, announces that “state licensees [state-licensed marijuana businesses] will no longer be subject to the deduction allowance imposed by Internal Revenue Code Section 280E.”
IRC §280E prohibits businesses trafficking in a Schedule I or II controlled substance from claiming business deductions. Specifically:
“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.”
Those deemed drug traffickers cannot take ordinary and necessary business deductions, which is a direct result of an infamous, 1980s-era tax court case, Commissioner v. Edmondson, T.C. Memo, 1981-623, 42 TCM 1533 (1981).
Jeffrey Edmondson, a Minnesota dealer of amphetamines, cocaine and marijuana, paid taxes on his illegal income. On his returns, Edmondson took ordinary and necessary business expenses to include the scale used to weigh the drugs, his packaging materials, some of his long-distance telephone calls, and even mileage.
When the IRS denied the deductions, Edmondson took his case to Tax Court. The Tax Court permitted the deductions in an Oct. 1981 decision. The court reasoned that nothing in the Tax Code prevented Edmonson from claiming the standard deductions for his business. Within a month, legislation to stop Edmondson’s practice was introduced in Congress. Nine months later, on Sept. 3, 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA), P.L. 97-248, containing the §280E provision, was signed into law by President Ronald Reagan.
Since then, those who traffic in Schedule I drugs (to include marijuana) and Schedule II drugs (to include cocaine and amphetamines) – the very drugs “trafficked” by Edmondson – cannot take ordinary and necessary business expenses.
Consider the Tax Impact of IRC § 280E on Marijuana Businesses
Ever since California legalized medical marijuana in 1996, those involved in the marijuana industry have been trying to find ways to avoid the application of §280E.
As legalization (whether medical or combination with adult recreation) has advanced in the states and U.S. territories, over 28 states and the District of Columbia have “decoupled” §280E from state tax codes. States such as Connecticut, New Jersey, New York and California, to name a few, allow marijuana businesses to deduct ordinary and necessary business expenses. (A few states never “coupled” and never barred such deductions, but are included in the decoupled state total).
As for federal tax returns, marijuana businesses (having no deductions for ordinary and necessary business expenses) have been limited to deducting just the cost of goods sold (COGS). This leaves cultivators (who grow the goods they sell) having been the best-positioned for taking deductions in the light of §280E.
The IRS and the Tax Court have, in all but one case, come down hard on marijuana businesses that file federal taxes and wrongfully deduct ordinary and necessary business expenses and/or mischaracterize a host of expenses as COGS (such as rent, advertising, insurance, salaries) when they are not.
Consider What the AAG’s Order Says About § 280E
The AAG’s order is unlike any previous drug rescheduling order in that it contains directives regarding tax treatment of those involved in the manufacture, distribution and use of banned (Schedule I) controlled substances.
Never before has a drug rescheduling order contained a subheading entitled “Tax Implications” (See page 17 of AAG order) or given directions to the Department of the Treasury about a substance purveyor’s “tax status” or advised that businesses consult with “tax counsel.” (AAG order, page 18).
The AAG’s order leaves lots of questions unanswered, and in the weeks since the issuance of the order, people in all aspects of the industry have been engaged with one another, along with lawyers and accounting professionals, trying to figure out what the order means and what steps to take in response.
As discussed above, many in the industry are asking whether they should register. Many have asked whether they can take advantage of the §280E relief without registering. Many, too, have inquired as to whether a business with both medical and adult recreational aspects can federally deduct from just the medical portion of the business.
The answers to these questions, at this time, just weeks after the AAG order, are not 100% certain. Anyone who claims to know is puffing. Best bet? Position oneself to take advantage of the change in tax treatment by consulting with a seasoned tax professional in cannabis.
Who Does the § 280E Relief Apply to and How?
The AAG’s order applies to state-licensed medical marijuana businesses and establishes a federal registration process. It remains to be seen, as there is no guidance yet provided by federal authorities, as to whether a marijuana business must federally register (that is, complete the DEA registration portal) and/or be accepted by the DEA as an acceptable medical registrant, in order to take advantage of the non-applicability of §280E.
Many tax professionals are of the view that 280E no longer applies to any state-licensed medical marijuana business, whether the business is federally registered or not. Some disagree and assert that state-licensed medical marijuana businesses must register with the DEA to obtain Schedule III status.
Additionally, what constitutes a state-licensed medical marijuana business has not yet been clearly defined.
As shown in the Werner-Simon Degrees of Legalization USA Map (above), some nine states (with explanations for Texas and Georgia’s inclusion in this category – for now) permit restrictive “severely limited access” (SLA) to medical marijuana. This includes states like South Carolina, which, in 2014, passed Julian’s law authorizing people with intractable epilepsy to use CBD low-THC oil, which also has a dormant 1980 Act, the South Carolina Controlled Substances Therapeutic Research Act, which, if the federal government reschedules a medical substance, South Carolina’s health agencies can follow suit.
SLA states include North Carolina, too, where one tribe, the Eastern Band of Cherokee Indians, as a sovereign nation, has, since 2024, the only operational dispensary in the state, which initially dispensed only medical.
SLA states include Iowa, too, which calls itself a medical state, but limits usage to only cannabis oil (not raw flower) and generally limits THC amounts to 90-day increments unless a waiver by state authorities is granted.
Also unclear, since the AAG’s order refers only to state-medical licensing regimes, is whether the AAG meant to include the four U.S. inhabited territories that have degrees of legalization, specifically Puerto Rico, a medical territory, and Guam, the U.S. Virgin Islands, and the Commonwealth of Northern Mariana Islands, which are combination adult recreational. (See Degrees of Legalization Map, above.) Tribes were not mentioned in the AAG’s order either.
Although tribes could be considered states under the federal tax code (see IRC Section 7871), under the U.S. Constitution, they are sovereign nations (like foreign countries). This is why federally recognized tribes, like the Eastern Band of Cherokee Indians in North Carolina, govern their own laws on cannabis, largely without federal or state approval.
However, what is clear is that those in the illegal market, operating without any state-authorized license, §280E still applies. The same is true for any business exclusively involved in state-legal adult recreational cannabis, which, for now, remains a Schedule I substance. For the adult recreational industry, it is business as usual, with no ordinary and necessary deductions to be taken on federal tax returns.
The Multimillion-Dollar Question Is What Happens to Those in the Industry Who Do Both?
Under a strict and literal interpretation of §280E, if a business purveys both medicinal and recreational cannabis, they are still trafficking in a controlled substance in violation of the CSA and cannot claim ordinary and necessary business deductions.
For states such as Pennsylvania that have legalized only medical marijuana, and all licenses awarded (except for testing) in the state, concern medical marijuana, there is little debate; §280E will no longer apply.
However, for combination states such as California, how to thread this needle presents a host of issues. It is a minefield for anyone in a combination state, no matter what aspect of the industry, be it cultivation, manufacturing, distribution, and/or retail.
Two U.S. Tax Court case decisions from 2007 and 2014, involving marijuana businesses, shed some light on how the IRS and the Tax Court might now decide the case of a combination business (one that is involved both with medical and recreational), which seeks to segregate or apportion deductions between permissible medical and impermissible recreational deductions.
The taxpayer in the case, Californians Helping to Alleviate Med. Problems, Inc., (CHAMP) v. Commissioner, 128 T.C. 173 (2007), which dispensed marijuana, proved to the Tax Court’s satisfaction that a portion of its business was not marijuana-related. The Tax Court held that that aspect of the business (a therapy “care giving” center) was a separate trade or business, apart from the sale of marijuana, and could take ordinary and necessary business expenses. The illegal marijuana portion of the business could not.
The Tax Court in CHAMP held that where a marijuana business can clearly distinguish (that is, prove) which activities are related to "cannabis" and those that are "non-cannabis" related, for the latter, customary and normal deductions would apply.
In contrast, the Tax Court, five years later, in 2014, came to a different conclusion on segregation of businesses under one roof. The court held that even though the taxpayer in Olive v. Commissioner, 139 T.C. 19 (2012), argued that it had a separate care-giving portion of his dispensary, he was, in fact, operating one trade or business, and deductions were disallowed.
The industry has become more sophisticated since the CHAMP and Olive cases, with the legal U.S. industry generating more than $33.8 billion in sales in 2025. Many states have adopted METRC (Marijuana Enforcement Tracking Reporting Compliance) systems and POS (point-of-sale software) for end-to-end tracking of sales.
Many medical states, as well as some severely limited access states, issue “medical” cards for medical users. In some of these places, the sale or distribution of medical cannabis products incurs lower state taxes and fees than adult recreational cannabis products. These records could be used to flesh out which expenses of a business relate to medical and which to recreational, for tax purposes.
Businesses are required to keep records under Internal Revenue Code §6001, and, since the inception of state-legal regimes, poor recordkeeping has resulted in tax problems for some cannabis businesses.
However, the prevalence of better recordkeeping across swaths of the legal industry means that marijuana businesses can view the AAG’s order as an opportunity to segregate medical and recreational activities into separate businesses or separate activities. An argument could be made, vis-à-vis a combination operation, that only the adult recreational business is subject to §280E’s restrictions, not the medical business. Do not be surprised by the proliferation of a new kind of tax computation expert, “the §280E medical and adult recreational ‘apportioner.’”
It is not hard to imagine that some in the tax field will use the AAG’s order to argue that all cannabis has medicinal properties, whether used recreationally or not, and that §280E should no longer apply to all cannabis businesses.
Given that the Treasury Department’s April 23, 2026, notice, in which it announced future plans to issue guidance on the AAG’s order, also links §280E to rescheduling (that is, to Schedule III medical marijuana), it is highly unlikely that such an argument will work with the IRS or in Tax Court, unless or until all marijuana is rescheduled. §280E’s deduction restrictions apply only to the trafficking of Schedule I and II substances.
There Are Open Questions as to the Timing of §280E and How Far Back (How Retroactive) the Relief Will Be
The AAG’s order is effective April 22, 2026. Putting aside the questions (discussed above) of to whom it applies (be they successful federal registrants or non-applicants so long as they have a state-license) or how or even if one can apportion medically related ordinary and necessary expenses in a combination state, the April 22, 2026, date marks, at a minimum, the date on which ordinary and necessary expenses can be deducted by marijuana businesses covered by the AAG’s order.
On April 23, 2026, the Department of the Treasury, on its website, announced that the Treasury and the IRS would (in the future) be issuing tax guidance as a result of the issuance of the AAG’s order on rescheduling medical marijuana.
The Department of the Treasury’s April 2026 two-page press release suggested that a future “transition rule” for “§280E purposes” will apply to the first full taxable year that would include the effective date of the AAG’s order. This indicates that ordinary and necessary deductions could apply for the entirety of the current tax year (2026) for calendar year taxpayers or for the fiscal year (that includes April 2026) for fiscal year filers.
The future guidance, as the Treasury press release explained, is expected to address how the deductions of such ordinary and necessary expenses for medical marijuana businesses would be effectuated. The IRS intimated that there would be guidance as to some form of graduated, transitional application corresponding to full, partial and/or past tax years.
Just how far back the relief can go is not clear from the AAG’s order. The AAG included a clear message to the Secretary of the Treasury to retroactively apply the §280E relief. On page 23, the AAG “encourages 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, retrospective §280E relief could easily conflict with the statute of limitations related to refund relief. Consider a marijuana business that operated under a state marijuana business license for five years. If the Secretary of the Treasury heeds the suggestion in the AAG’s order at page 23 about retrospective relief from §280E, marijuana businesses having paid more taxes than they should have given §280E compliance, should be seeking refunds.
A taxpayer’s right to a refund for overpayment of taxes is not indefinite. There are time limits (statute or period of limitations) for seeking federal refunds. Internal Revenue Code Section 6511(a) provides that a refund for overpayment must be filed within three years from the filing of the return, or two years from the date the tax was paid, whichever expires later.
Internal Revenue Code Section 6511(b) states that unless the taxpayer has made “a claim for credit or refund” within the period of limitation, no credit or refund will be allowed or made. Claims for refunds, per Internal Revenue Code Regulation Section 301.6402-2(b)(1), must “detail each ground upon which a credit or refund is claimed” and have sufficient facts in support of the claim, all sworn to under penalty of perjury in the form of a first-person narrative (a written declaration).
Sometimes, an imperfect claim for refund (one that has not fulfilled all the Internal Revenue criteria) can constitute an informal refund claim. The filing of a claim for a refund, perfect or imperfect, stops the expiration of the statute of limitations.
There is nothing in the Internal Revenue Code or Treasury regulations about what to do if one anticipates a law or enforcement change, like what is happening now with changes to the §280E application. But a unanimous U.S. Supreme Court, in 1941, in the case of Kales v. United States, 314 U.S. 186, held that a taxpayer’s letter to the IRS seeking a refund of overpaid taxes stopped the expiration of the statute of limitations concerning refunds. This citizen action has come to be called the filing of a protective claim.
In the past, the IRS has discouraged protective claims by marijuana businesses hopeful for a change in marijuana’s Schedule I status or who have argued that §280E should not apply to marijuana businesses because marijuana (as legalized states have shown) has medicinal properties. Since the uptick in state legalization, and well before the issuance of the AAG’s order, some marijuana businesses have filed amended returns seeking 280E and/or filed Kales protective refund claims. Some have faced rejection of their amended returns, demands for the payment of back taxes and/or penalties.
As recently as March 2026, the IRS, in New Mexico Top Organics v. Commissioner Docket, No. 19661-24, a refund case, took the position that §280E applies to all marijuana businesses, whether state legal or not, and that marijuana remains a federally illegal Schedule I controlled substance.
Much has changed in two months, and tax professionals (not always in agreement) are finding common ground in advising, in the light of the AAG’s order, to file protective claims with the IRS to stop the expiration of the statute of limitations for refunds from the IRS. If the Treasury Department rolls back retroactivity to the date of state licensure, many marijuana businesses will have already lost ground and money, given that some refunds will be time-barred by the statute of limitations. Now, with this sea change, tax professionals are advising businesses to get busy and file those protective claims.
Marijuana businesses should talk to experienced tax professionals and take a look at Internal Revenue Code Form 843 to claim a refund or to request that certain taxes, interest, penalties and fees not apply.
It is conceivably possible that the Treasury will clarify retroactivity and create new and helpful provisions to address recompensing state-licensed marijuana businesses whose refunds are barred by the statute of limitations, but few are counting on such relief. Now is the time to be proactive and file protective claims.
Conclusion: What’s a Marijuana Business to Do to Assess Risk Exposure?
Whether or not the treaty justification for Schedule III withstands legal challenges, and apart from what happens at the DEA’s rescheduling hearing set for this summer, exclusively medical marijuana businesses and well-capitalized MSOs with money to pay for expert legal and tax advice, with the funds to await the resolution of possibly years of legal challenges, are sitting pretty.
Businesses in exclusively medical states involved in the cultivation, manufacturing and dispensing of medical marijuana face less risk by federally registering with the DEA than those in combination (adult and medical) states.
For those in combo states, registering with the DEA (at this time – before or until all marijuana is rescheduled) presents a significant risk. Some of the information sought in the DEA’s registration portal could result in federal criminal exposure for charges to include unlawful possession (21 U.S.C. § 844), possession with intent to distribute (21 U.S.C. § 841), as well as money laundering charges for engaging in monetary transactions with proceeds of unlawful (trafficking) activity, in violation of 18 U.S.C. § 1956 & 1957, to name a few.
We are in a new era. This bifurcated scheduling approach to marijuana, in which the same substance (from the cannabis sativa plant with in excess of 0.3% THC in dry weight) is placed into two CSA scheduling classifications, will surely be challenged by some stakeholders. That medical marijuana has been segregated from recreational marijuana ostensibly to comply with international treaty requirements is actually a 180-degree switch from over 50 years of treaty compliance under the Single Convention.
Under the AAG’s order, the federal government will now “control” state practices. It is unclear what that will mean and how much state flexibility and ingenuity will be sacrificed. “Giving deference” to state practices does not mean that state practices must be followed or will be followed. Many states that have social equity programs permitting those with criminal histories to participate in the industry are at significant risk with this federal control.
As of today, recreational marijuana remains a Schedule I drug, and this industry that persists throughout America and some of its territories violates the Single Convention. Further, should, as a result of the June 2026 DEA administrative hearing, recreational marijuana be rescheduled to Schedule III, this too will constitute a violation of the Single Convention and the other multilateral drug treaties on which the U.S. is a signatory.
How all this shakes out is anyone’s guess. And if the Schedule III classification remains for some or all marijuana in the U.S., it will certainly take time for all the federal agencies to come aboard and start speaking in one voice.
The takeaways? Carefully scrutinize what the federal government is representing and get experienced lawyers and accountants on your payroll. Keep impeccable records because one day, if all marijuana in the U.S. becomes Schedule III, then all marijuana businesses will be able to deduct all those lawyer and accountant fees as ordinary and necessary expenses – just like everyone else outside the industry. That day may soon come.
