Treasury announces long-awaited tax relief for medical cannabis industry

On April 23, 2026, Treasury and the IRS announced that they plan to issue guidance addressing the federal tax consequences of a DOJ/DEA final order (the order) dated April 22, 2026, rescheduling certain cannabis-related products (covered medical cannabis, defined below) from Schedule I to Schedule III under the Controlled Substances Act. According to the DOJ press release, the order “immediately” reschedules covered medical cannabis and implements President Trump’s Dec. 18, 2025, executive order, Increasing Medical Marijuana and Cannabidiol Research.

For purposes of this alert, “covered medical [cannabis]” refers to cannabis, cannabis extracts and certain naturally derived delta-9-THCs that, as described in the order, are either contained in FDA-approved drug products or subject to a qualifying state medical cannabis license.

• Note: The order does not reschedule adult-use/recreational cannabis or other cannabis products outside the covered categories.

Significantly, DOJ also announced an expedited administrative hearing beginning June 29, 2026, to consider broader rescheduling of cannabis from Schedule I to Schedule III.

Takeaways

Welcome section 280E relief for covered medical cannabis activities. Treasury and the IRS expect the order to have significant positive tax consequences for businesses engaged in covered medical cannabis activities. Section 280E generally disallows deductions and credits for amounts paid or incurred in carrying on a business that consists of trafficking in Schedule I or II controlled substances, other than amounts properly included in cost of goods sold. Accordingly, for businesses whose activities no longer involve Schedule I or II controlled substances as a result of the order, §280E is generally expected to no longer bar otherwise allowable deductions and credits.

Adult-use/recreational cannabis remains subject to section 280E. Although legal in many states, adult-use/recreational cannabis remains listed in Schedule I under federal law unless and until further federal action is taken. Businesses engaged in adult-use/recreational cannabis activities should continue to evaluate section 280E exposure and closely monitor developments in the administrative hearing scheduled to begin on June 29, 2026.

Expense allocation guidance is forthcoming. Treasury has indicated that forthcoming guidance is expected to address how section 280E applies to businesses with multiple activities, including activities that remain subject to section 280E and activities that do not. This guidance will be particularly important for vertically integrated operators and businesses with both medical and adult-use/recreational operations.

Transition and potential retrospective relief. Treasury expects the guidance to include a transition rule under which, for section 280E purposes, rescheduling generally will apply to the full taxable year that includes the order’s effective date, for activities that, as a result of the order, no longer involve Schedule I or II controlled substances. The order also encourages Treasury to consider retrospective section 280E relief for prior taxable years in which a taxpayer operated under a state medical cannabis license, but Treasury has not yet announced whether or how it would provide such relief.

Planning considerations. Affected taxpayers should evaluate the impact on estimated taxes, cash taxes, deferred taxes, return positions, financial reporting, state tax conformity, and compliance processes. As an initial matter, taxpayers should confirm that their products, licenses, and activities fall within the order’s covered categories before assuming section 280E relief applies. Taxpayers should also consider whether changes in facts or law warrant accounting method changes, elections, or revised book-tax procedures. Areas for review may include inventory costing, section 263A, depreciation and capitalization policies, prepaid expenses, accrued liabilities, and section 481(a) adjustments. Taxpayers under examination, those with open refund claims or amended returns, and those that implemented prior section 280E planning strategies should consult tax counsel before changing positions.

Next steps

Baker Tilly is monitoring the forthcoming Treasury and IRS guidance and will issue additional alerts as developments occur. Please contact your Baker Tilly advisor with questions.