On April 22, 2026, Acting Attorney General Todd Blanche signed a final order (“Final Order”)[1] immediately rescheduling state-licensed medical marijuana from Schedule I to Schedule III of the Controlled Substances Act (“CSA”),[2] pursuant to President Trump’s 2025 Executive Order directing federal agencies to expedite the rescheduling of medical marijuana.[3] This change may materially affect the federal income tax treatment, valuation, and estate planning considerations applicable to owners of state-licensed medical marijuana businesses. In states with medical marijuana programs, including Mississippi, those affected should pay close attention to these changes.
We have previously written about the application of IRC § 280E to marijuana dispensaries and the general tax and planning landscape for marijuana business owners in Mississippi.[4] Those writings described an environment in which federal tax law treated all cannabis businesses as criminal enterprises for purposes of computing taxable income as a result of marijuana being categorized as a Schedule I controlled substance. The Final Order materially changes that environment for state-licensed medical marijuana businesses.
The Final Order
The Final Order places two specific categories of marijuana in Schedule III:
(1) drug products containing marijuana that have received FDA approval, and
(2) marijuana subject to a state-issued license to manufacture, distribute, and/or dispense marijuana for medical purposes.
Critically, recreational or adult-use marijuana, even where legal under state law, remains a Schedule I controlled substance. State-licensed medical marijuana businesses and recreational marijuana businesses now occupy materially different positions under federal tax law. In Mississippi, all licensed operators under Mississippi’s Medical Cannabis Act[5] should fall within the Final Order’s Schedule III rescheduling, while recreational cannabis remains prohibited under Mississippi law.
Income Tax Consequences
Section 280E Relief for State-Licensed Medical Marijuana Operators
- 280E has been a punishing tax provision for marijuana businesses since the 1980s. It disallows all deductions and credits for any trade or business that traffics in controlled substances listed in Schedule I or II of the CSA.[6] As a result, ordinary operating expenses such as wages, rent, utilities, and officer compensation were categorically nondeductible, leaving cost of goods sold as the only avenue for reducing taxable income attributable to the costs of operating a marijuana business.[7]
The Final Order directly addresses § 280E, stating that “state licensees will no longer be subject to the deduction disallowance imposed by Section 280E of the Internal Revenue Code, which applies only to businesses engaged in ‘trafficking in controlled substances . . . in a schedule I or II.'” As a result, state-licensed medical marijuana operations will no longer be subject to § 280E’s disallowance of ordinary business deductions beginning in 2026. Effective income tax rates may fall dramatically.
The 2026 Transition Rule
On April 23, 2026, Treasury and the IRS announced that formal guidance addressing the federal tax consequences of the Final Order is forthcoming.[8] For businesses with both medical and recreational sales, that guidance will ideally clarify how § 280E applies only to activities involving Schedule I or II controlled substances, potentially through some method of expense apportionment. Because Mississippi does not currently permit recreational cannabis, that issue is less immediately relevant for purely Mississippi-based operators.
Treasury has also indicated that forthcoming guidance will include a transition rule under which the rescheduling will first apply for a business’s full taxable year that includes the effective date of the Final Order. For calendar-year taxpayers, that would mean § 280E relief applies as of January 1, 2026, eliminating the need to allocate expenses between pre- and post-rescheduling periods within the same tax year.
Retroactivity Potential
The most significant unresolved issue is whether state-licensed medical marijuana operators may obtain retroactive relief from § 280E for tax years predating the rescheduling. The Final Order encourages 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.” That language does not require Treasury to act, but it does signal that retroactive relief is under consideration. Treasury’s April 23 press release did not address the issue.
If retroactive relief is ultimately offered, operators who previously paid taxes based on § 280E limitations could potentially file amended returns to claim refunds for open years.[9] Filing amended returns may increase audit risk before the availability of retroactive relief is confirmed. The IRS has recently argued that prior-year taxes were owed in full, i.e. subject to § 280E, regardless of any prospective rescheduling.[10] Where amended returns are not yet filed, practitioners may consider advising appropriate clients to file protective refund claims for open years in order to preserve the opportunity for a refund while the statute of limitations continues to run.
Additional Income Tax Considerations
The inapplicability of § 280E also affects several other income tax provisions. Pass-through owners of state-licensed medical marijuana businesses should now generally qualify for the § 199A qualified business income deduction, subject to the usual threshold and phaseout rules. For eligible owners, that may further reduce effective tax rates.
For individual patients, the rescheduling may open the door to a § 213 medical expense deduction for state-licensed medical marijuana purchases. Prior to the Final Order, the IRS disallowed such deductions because marijuana’s Schedule I status meant purchases were not “legally procured.”[11] With state-licensed medical marijuana now in Schedule III, the primary basis for that position is eliminated. However, the § 213 deduction for drugs requires a physician’s prescription (not just recommendation),[12] which remains an important limitation.
Entity selection also warrants reconsideration. The elimination of § 280E removes some of the distortions that historically made certain entity forms less attractive for cannabis businesses. As a result, the comparative merits of C corporations, S corporations, and partnerships may now more closely resemble the analysis applicable in other industries. Business owners should revisit prior entity-selection decisions, as restructuring may now be both feasible and advantageous.[13]
Estate Planning Consequences
Valuation and Estate Planning
Just like other assets, interests in a cannabis business included in the owner’s gross estate are valued at fair market value as of the date of death under a “willing buyer, willing seller” standard which also would apply to valuing gifts of cannabis businesses.[14] Historically, the burden imposed by § 280E tended to suppress cannabis business valuations. If § 280E no longer applies to qualifying state-licensed medical marijuana businesses, after-tax earnings may increase materially, and valuations may rise accordingly for gift and estate tax purposes. Owners who have not yet made lifetime gifts of marijuana business interests should evaluate whether current transfers make sense before improved economics are fully reflected in appraisals. The current gift, estate, and generation-skipping transfer tax exemptions create meaningful planning opportunities. As with any asset expected to appreciate substantially, transferring interests before that increase is fully reflected in value may help remove future appreciation from the transfer-tax system. For some owners, now may be an especially favorable time to consider transfers of marijuana business interest.
Of course, state law limitations on ownership transfers must still be analyzed carefully. State licensing requirements do not disappear merely because qualifying medical marijuana has been moved to Schedule III. For example, Mississippi’s Medical Cannabis Act imposes qualification requirements on prospective licensees, and transfers of ownership interests may require regulatory compliance.[15] Succession plans should therefore confirm that proposed beneficiaries, trustees, and successors can satisfy applicable licensure criteria and that business operations will not be disrupted during estate administration. Buy-sell agreements with formula-based pricing tied to historical earnings or fixed multiples should also be revisited, as those formulas may no longer reflect fair value in a post-§ 280E environment.
Fiduciary and Trust Administration
Cannabis-related trusts and estates have long presented special planning difficulties. Trustees generally have a duty to administer trusts lawfully, and many corporate fiduciaries have been reluctant to serve where an estate or trust held an interest in a marijuana business.[16] With state-licensed medical marijuana now moved to Schedule III, some of the federal-law concerns that historically complicated fiduciary administration may be materially reduced for qualifying medical marijuana business interests. That development creates an opportunity to revisit existing trust instruments and estate plans that previously excluded cannabis business interests from corporate trustee administration or relied on special-purpose fiduciaries solely because of the prior Schedule I issue.
Conclusion
The April 2026 rescheduling of state-licensed medical marijuana from Schedule I to Schedule III is a significant development in the tax and planning landscape for cannabis business owners. For qualifying businesses, the anticipated elimination of § 280E may materially reduce federal income tax burdens and may also affect valuation, gifting strategy, succession planning, buy-sell arrangements, and fiduciary design.
Important questions remain, including the scope of any retroactive relief and the mechanics of expense allocation for operators with both medical and recreational activities. Even so, owners of cannabis business interests and their advisors should begin evaluating how this change may affect current tax positions and future planning. Depending on the circumstances, that review may include protective refund claims, amended income tax return considerations, lifetime gifts, entity restructuring, or revisions to estate planning documents and fiduciary appointments.
[1] https://www.justice.gov/opa/media/1437751/dl
[2] 21 U.S.C. § 801 et seq.
[3] https://www.whitehouse.gov/presidential-actions/2025/12/increasing-medical-marijuana-and-cannabidiol-research/.
[4] Allen, Charles J., “Tax Court Denies Deduction for Business Expenses of Operating a Marijuana Dispensary,” May 21, 2020, https://esapllc.com/richmond-280e/; and Edmondson, Gray, “Tax Considerations – Initiative 65 and Medical Marijuana in Mississippi,” Dec. 4, 2020, https://esapllc.com/ms-init65/.
[5] Miss. Code Ann. § 41-137-1 et seq.
[6] § 280E provides: “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.”
[7]See Richmond Patients Group v. Commissioner, TC Memo 2020-52; Californians Helping to Alleviate Med. Problems, Inc. (“CHAMP”) v. Commissioner, 128 T.C. 173 (2007); Olive v. Commissioner, 139 T.C. 19 (2012).
[8] https://home.treasury.gov/news/press-releases/sb0471.
[9] Under IRC § 6511(a) open years generally would be the later of two years after payment of the tax or three years from the date the return was filed.
[10] See New Mexico Top Organics, Inc. (d/b/a Ultra Health) v. Commissioner, (Docket No. 19661-24).
[11] Rev. Rul. 97-9.
[12] § 213(d)(3); Treas. Reg. § 1.213-1(e)(2).
[13]See Edmondson, “Tax Considerations – Initiative 65 and Medical Marijuana in Mississippi,” supra note 4 (discussing § 199A and choice of entity considerations, including qualified small business stock under § 1202).
[14] §§ 2031, 2033, and 2512. Treas. Reg. § 25.2512-1.
[15] Miss. Code Ann. §§ 41-137-1 et seq.
[16] Restatement (Third) of Trusts § 72; Uniform Trust Code § 404; 21 U.S.C. § 854. See also Edmondson, Tax Considerations – Initiative 65, supra note 4.
