Introduction
Rumors of marijuana rescheduling have again dominated the headlines, with reports that President Trump is considering an executive order to move marijuana from Schedule I to Schedule III of the Controlled Substances Act. [1] [2] As I previously discussed in my September 19, 2024 blog post, one fundamental truth remains unchanged: rescheduling does not equal legalization. While the prospect of Schedule III classification has generated considerable excitement in the cannabis industry, businesses and consumers need a clear-eyed understanding of what rescheduling actually accomplishes, and what critical limitations persist.
Current Status of the Rescheduling Process
The rescheduling saga has been marked by significant procedural delays. Following the Department of Health and Human Services’ August 2023 recommendation to move marijuana to Schedule III, the Department of Justice published a Notice of Proposed Rulemaking in May 2024. [5] The DEA initially scheduled a hearing for December 2, 2024, but that hearing devolved into a preliminary scheduling conference rather than a substantive hearing on the merits. [6]
In January 2025, Administrative Law Judge John Mulrooney granted an interlocutory appeal and cancelled the merits hearings scheduled for January 21, 2025. [8] Proceedings remain stayed pending resolution of that appeal, with status updates required every 90 days. [8] With the Trump administration now signaling potential interest in moving forward via executive action, the timeline and ultimate outcome remain highly uncertain. [1] [2]
The Major Benefit: Section 280E Tax Relief
Without question, the most significant impact of rescheduling would be elimination of Internal Revenue Code Section 280E’s application to cannabis businesses. Section 280E prohibits taxpayers engaged in “trafficking” Schedule I or Schedule II controlled substances from deducting ordinary and necessary business expenses—including rent, utilities, salaries, marketing, and legal fees. [10] [11]
This creates a devastating tax burden. While traditional businesses face a 21% federal corporate tax rate, cannabis businesses routinely face effective tax rates of 40-80%, with many companies showing GAAP losses while owing substantial federal taxes. [12] [13]
If marijuana moves to Schedule III, Section 280E simply stops applying—the statute applies only to Schedule I and II substances. Cannabis businesses would immediately gain the ability to deduct ordinary and necessary business expenses, potentially reducing effective tax rates from 60-80% down to the standard 21% corporate rate. [15]
Critical Limitation: No refunds or carryback of prior losses will be available, as the IRS has made clear that marijuana remains Schedule I until a final rule is published in the Federal Register. The IRS rejected amended returns claiming over $100 million in refunds, stating they are “not valid.” [16]
Additionally, to qualify for 280E relief, businesses must be operating lawfully under the CSA—which for Schedule III substances means obtaining and maintaining DEA registration. [17] [18] [19] Unregistered cannabis businesses would still be engaged in unlawful activity.
Federal Criminal Prohibition Persists
A pervasive misconception is that rescheduling will substantially reduce criminal penalties. The reality is far more limited.
Marijuana-Specific Criminal Provisions Remain Unchanged
The Controlled Substances Act contains numerous criminal provisions that explicitly reference “marihuana” regardless of its schedule. [22] These marijuana-specific penalties remain fully intact upon rescheduling: 21 U.S.C. § 841 contains quantity-based mandatory minimum sentences specifically for marijuana (e.g., 1,000 kilograms triggers a 10-year mandatory minimum). [22] [23] [24] These thresholds are tied to the term “marihuana,” not to its schedule classification.
Recreational Sales Remain Federally Criminal
Rescheduling to Schedule III does not legalize adult-use cannabis under federal law. [25] [26] [27] [28] Schedule III substances may only be dispensed pursuant to a valid prescription issued by a DEA-registered practitioner for a legitimate medical purpose. Every adult-use market transaction would remain a federal crime even after rescheduling. State-legal recreational programs have no pathway to federal compliance under Schedule III. [28] [29] [30]
Minor Reductions in Some Criminal Penalties
Rescheduling would reduce penalties for some CSA violations where punishment depends on schedule classification:
- First offense trafficking (not meeting marijuana-specific thresholds): maximum sentence reduced from 20 years (Schedule I/II) to 10 years (Schedule III). [22] [24]
- Simple possession: reduced penalties for amounts not meeting marijuana-specific thresholds.
However, rescheduling provides no retroactive relief for past convictions or existing sentences. [31] Only state-level legislative reforms or executive pardons provide pathways to conviction relief. [32] [33] [34] [35]
Banking and Financial Services: Problems Persist
Many industry observers hoped rescheduling would resolve the cannabis industry’s banking crisis. Unfortunately, Schedule III classification provides minimal improvement.
Bank Secrecy Act and Anti-Money Laundering Laws Continue to Apply
Banks servicing cannabis businesses must continue to comply with Bank Secrecy Act obligations, which require assessment of client risk and ensure they are not facilitating unlawful activity. [36] They must file Suspicious Activity Reports (SARs) with FinCEN for clients suspected of criminal activity, which continues to include state-legal cannabis operators selling marijuana without federal authorization. [36]
Since recreational cannabis sales remain federally illegal even under Schedule III, banks could face money laundering prosecution when handling funds from adult-use dispensaries. [36] Bank employees could face up to 10 years imprisonment for knowingly processing deposits from marijuana sales that violate federal law. [36]
As the Congressional Research Service concluded: “rescheduling marijuana as DOJ has proposed is unlikely by itself to eliminate the legal risks of financial institutions serving marijuana businesses.” [38] Only legislative solutions like the SAFER Banking Act can provide the legal certainty financial institutions require. [39]
FDA Approval Requirements and the Pharmaceutical Pathway
Rescheduling marijuana to Schedule III does not make cannabis products immediately available through pharmacies or provide any shortcut around FDA drug approval requirements.
Schedule III substances require FDA approval before any drug product can be lawfully “introduced or delivered for introduction into interstate commerce.” [27] [40] To obtain FDA approval, a pharmaceutical company must submit an Investigational New Drug application, conduct Phase I, II, and III clinical trials, and submit a New Drug Application. This process typically takes 10-20 years and costs hundreds of millions of dollars per approved drug. [26] [42]
Cannabis products sold through state-licensed dispensaries are not FDA-approved drugs. [26] [43] Even after rescheduling, marijuana “cannot be used recreationally in food, dietary supplements, tobacco products, or cosmetics” under federal law. [25] State medical marijuana programs would continue operating in a legal gray area: authorized by state law but unapproved under federal law. [43]
DEA Registration and Regulatory Compliance
If marijuana moves to Schedule III, businesses handling cannabis would face extensive DEA registration and regulatory requirements that few state-licensed operators currently meet. The CSA prohibits any person from manufacturing, distributing, or dispensing Schedule III substances without DEA registration. [17] [18] [19]
Registered entities must obtain and maintain DEA registration, take initial and biennial inventories, maintain detailed records, file reports for suspicious orders, provide adequate physical security, and comply with import/export permit requirements. [17] [18] [19]
The fundamental problem is that Schedule III substances must be dispensed only pursuant to valid prescriptions for legitimate medical purposes. [17] [44] State medical marijuana programs typically use “recommendations” rather than prescriptions, and recreational programs have no prescription requirement at all. [30] [45] Robert Mikos of Vanderbilt Law School notes: “I suspect that few (if any) of the more than 12,000 firms now licensed by the states to produce and/or sell marijuana will be able and willing to scrupulously comply with all the new regulations the CSA will throw at them.” [46]
Cannabis businesses would face the prospect of simultaneously complying with state licensing requirements and federal Schedule III regulations—systems designed with different purposes and requirements. [30] [47]
Research and Development: Modest Improvements
Moving marijuana to Schedule III would eliminate the most stringent Schedule I research registration requirements, allow more research facilities to obtain DEA authorization, reduce security and recordkeeping controls, and enable institutional review boards to more readily approve clinical trials. [48] However, FDA approval standards for safety and efficacy remain unchanged. [49] Any entity seeking to market a marijuana-based drug must still complete the full Phase I-III clinical trial process.
Conclusion: Rescheduling Is Not Legalization
Rescheduling marijuana from Schedule I to Schedule III would represent a meaningful but decidedly incremental reform. The primary benefit—elimination of Section 280E’s crushing tax burden—could transform the economics of state-licensed cannabis operations. Research opportunities would expand modestly, and some criminal penalties would decrease slightly.
However, the limitations are far more substantial than many industry participants appreciate:
- Recreational sales remain entirely federally illegal
- FDA approval is required for any lawful interstate commerce
- Banking problems persist absent Congressional action
- DEA registration requirements create massive compliance challenges for state programs
- Criminal penalties for marijuana-specific offenses remain unchanged
- No retroactive relief for past convictions or prior tax years
Rescheduling to Schedule III would not resolve the fundamental conflict between state legalization programs and federal prohibition. Instead, it would create a new set of regulatory conflicts and compliance challenges, particularly around DEA registration requirements and FDA approval mandates that state-licensed operators cannot realistically meet. For businesses and consumers, the message is clear: hope for 280E relief, but prepare for continuing federal prohibition and regulatory complexity. Normalization of the cannabis industry requires either complete descheduling or comprehensive federal legalization legislation, way more than the incremental progress rescheduling could represent.