A group of House Democrats has urged the IRS to issue prompt guidance for state-legal cannabis businesses following the recent rescheduling of certain marijuana products. The lawmakers seek clarity on the federal income tax treatment of these businesses — particularly on access to credits and deductions previously barred under IRC § 280E.
Rescheduling Impacts Tax Treatment
This April, the Justice Department and the Drug Enforcement Administration issued a final order moving certain marijuana products from Schedule I to Schedule III of the Controlled Substances Act. The order applies specifically to FDA-approved products containing marijuana and marijuana products regulated by a state-issued medical marijuana license. It does not apply to other forms of marijuana, such as those sold for recreational use, which remain Schedule I substances.
This change impacts cannabis businesses’ federal income tax treatment. Section 280E prohibits businesses from taking tax deductions or credits for expenses paid or incurred while “trafficking in controlled substances” listed in Schedule I or II — but the prohibition does not apply for Schedule III substances.
Section 280E has long limited cannabis businesses from deducting ordinary and necessary business expenses, such as rent and payroll, under IRC § 162. Section 280E also bars these businesses from taking advantage of depreciation provisions under IRC § 167. In addition, it prohibits them from taking other key business credits and deductions, such as the IRC § 170 charitable contribution deduction and the IRC § 164 state and local tax deduction.
Because the DOJ’s order moved state-licensed medical marijuana to Schedule III, businesses that deal exclusively in these products are no longer subject to the limitations of § 280E. However, things aren’t as clear for businesses that have both recreational and medical marijuana operations.
Specific Uncertainties for Businesses
In a May 28 letter to IRS CEO Frank Bisignano and Treasury Secretary Scott Bessent, the lawmakers highlight the urgent need for guidance to address the ambiguous situation created by the partial rescheduling. The letter, led by Representatives Steven Horsford (D-NV) and Steve Cohen (D-TN), points out that many state-legal cannabis businesses operate in a complex environment and require clarity on how to apply the tax law.
The lawmakers request “unambiguous guidance” for businesses that operate under a single state-issued license covering both adult-use (recreational) and medical cannabis as well as for businesses that hold two separate state-issued licenses for these operations.
As of March 2026, 40 states and the District of Columbia have laws allowing for the use of medical marijuana, per a Congressional Research Service report. Eight additional states provide limited access to cannabis products for medical purposes — these states only allow use of low THC, high cannabidiol.
However, many states that allow medical marijuana use also allow recreational use. As of March 2026, the CRS says that 24 states and DC allow recreational marijuana use.
IRS Guidance Planned
Concurrently with the DOJ’s April rescheduling order, the IRS announced that it will issue guidance clarifying how § 280E applies for these businesses with both recreational and medical cannabis operations. In an April 23 press release, the IRS previewed that the guidance would cover expense apportionment.
The IRS said the forthcoming guidance also would include transition rules for dual-operation businesses. The transition rules would apply for a business’ full tax year that includes the effective date of the DOJ’s rescheduling order.
In their letter, the lawmakers urge the IRS to work with federal partners and states in issuing guidance. They suggest the IRS collaborate with the Small Business Administration and other relevant agencies to ensure the guidance is widely communicated once released.
In addition, the Democrats suggest the IRS seek input from the cannabis sector. Doing so, they say, can help ensure guidance is “robust and complete.”
The DOJ has scheduled a hearing on a proposed rule to more broadly reschedule marijuana beginning on June 29. However, the final outcome and timeline of that wider rescheduling effort is unclear.
For more information on expenses of illegal businesses, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-2630.
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