DOJ Moves FDA Approved and Medical Marijuana to Schedule III

This is the most consequential shift in federal cannabis policy in more than five decades. The order follows President Trump’s December 18, 2025, executive order on “Increasing Medical Marijuana and Cannabidiol Research,” which directed the Attorney General to complete the rescheduling process as expeditiously as permitted by law. This alert covers the final order’s key provisions, its Section 280E tax implications, the expedited US Drug Enforcement Administration (DEA) registration pathway (which opened April 29 at 12 PM EST and is available here), the upcoming hearing on broader rescheduling, and anticipated legal challenges.

Background

Cannabis has been classified as a Schedule I substance, reserved for drugs with no accepted medical use and a high potential for abuse, since the CSA’s enactment in 1970. In August 2023, the US Department of Health and Human Services (HHS) determined that marijuana had a currently accepted medical use and was less dangerous than other Schedule I and II drugs and alcohol. The US Department of Justice (DOJ) followed in May 2024 with a formal recommendation to reschedule marijuana to Schedule III, backed by an Office of Legal Counsel opinion that neither international treaty obligations nor the CSA required keeping marijuana in Schedule I. 

The administrative process then stalled. In January 2025, pro-rescheduling parties obtained a stay on the DEA’s hearing to air allegations the agency had coordinated with anti-reform activists. Those proceedings remained in limbo until the final order was released on April 23. The DOJ and DEA have now reset the process with a new notice of hearing and clarified timelines.

Key Provisions of the Final Order

• Immediate Schedule III Placement: The order moves FDA-approved cannabis products and state-licensed medical cannabis from Schedule I to Schedule III, effective immediately. A “state medical marijuana license” is defined as a license issued by a state, the District of Columbia, or a federal territory authorizing the manufacture, distribution, or dispensing of marijuana for medical purposes.

• Adult-Use Cannabis Remains Schedule I: All marijuana not covered by an FDA approval or a state medical license remains Schedule I, subject to the full range of regulatory controls and administrative, civil, and criminal sanctions.

• Synthetic THC and Hemp Unaffected: Synthetic THC remains Schedule I, and the order does not alter the legal status of low-THC hemp.

• Expedited DEA Registration Pathway: The DEA is establishing an expedited registration process for state-licensed medical marijuana operators. Applicants that submit within 60 days of publication (by June 27) will be permitted to engage in manufacture, distribution, or dispensing for medical purposes in conformity with their state licenses while the application is pending, and the DEA committed to make every effort to process those applications within six months. Registration issued under this pathway cannot exceed the scope of the holder’s state license and will automatically suspend if the state license is suspended, revoked, or expires. Registered entities will operate lawfully under federal law within Schedule III’s framework and treaty‑compliance constraints.

• Integration of State Licensing Frameworks: The acting attorney general concluded that incorporating state licensing systems into the federal registration framework is the most effective way to achieve the CSA’s objectives for medical marijuana while minimizing disruption for patients and existing state programs. Registrants may rely on state-law labeling, packaging, disposal, and physical security requirements in lieu of otherwise applicable federal requirements, provided they include the statutory warning label required by 21 U.S.C. § 825(c) (i.e., a warning that it is a crime to transfer the drug to anyone other than the patient). State‑authorized medical certifications or equivalent documents may serve in lieu of a Schedule III prescription for dispensing if they include the user’s name and address, are dated and signed on the day of issuance, and identify the issuing practitioner and state license number as authorized by state law.

Tax Implications Under Section 280E

For state-licensed medical cannabis operators, the most immediate impact is relief from Section 280E of the Internal Revenue Code. Section 280E disallows deductions and credits for businesses trafficking in Schedule I or II controlled substances, where the trafficking is prohibited by federal law or the law of any state in which the business is conducted. With medical marijuana now in Schedule III, these operators may claim income tax credits and deduct ordinary and necessary business expenses, including rent, payroll, marketing, and other operating costs, from income on par with other businesses.

In tandem with the DOJ order, the US Department of the Treasury and the Internal Revenue Service (IRS) announced on April 23 that they plan to issue guidance on the principal tax issues arising from the order, which they expect to have “significant positive tax consequences for businesses in the medical marijuana industry.” Anticipated areas of guidance and other key points include:

• Apportionment for Dual-License Operators: For businesses engaged in both medical and adult-use operations (or other activities), guidance is expected to clarify that Section 280E applies only to adult-use activities, with expenses apportioned accordingly. This analysis may be particularly complex in states with blended programs, where operators hold hybrid licenses or endorsements, and inputs may not be clearly segregated between medical and adult-use channels.

• Transition Rule: Treasury and the IRS expect to include a transition rule providing that rescheduling will generally be considered to first apply for a business’ full taxable year that includes the effective date of the final order. For businesses that are calendar-year taxpayers, this will be the 2026 calendar year.

• Retroactive Relief Uncertain: The DOJ order encourages Treasury to consider retrospective Section 280E relief for prior taxable years in which a state licensee operated under a state medical marijuana license, but it disclaims that nothing in the rule constitutes a determination regarding federal tax liability, urging state licensees to consult with tax counsel on the applicability of Section 280E to their particular circumstances. The initial Treasury and IRS announcement does not mention retroactive relief.

• Adult-Use Operators Unaffected: Section 280E continues to apply in full to adult-use cannabis businesses.

Upcoming DEA Administrative Hearing on Broader Rescheduling

Concurrent with the final order, the DOJ directed the DEA to restart hearings on a broader proposal to reschedule all marijuana, including adult-use cannabis. The new hearing is set for June 29 through July 15 before a DEA administrative law judge. The prior proceedings initiated under the May 2024 Notice of Proposed Rulemaking are now terminated.

Interested parties have 30 days from publication to signal their intention to participate by filing a written notice with the DEA, and the acting attorney general will notify selected participants on June 22. Notices of intention must state the interest of the person in the proceeding, the objections or issues the person desires to be heard on, and the person’s position regarding those objections or issues.

Anticipated Legal Challenges

The order is expected to face prompt legal challenges. Smart Approaches to Marijuana (SAM), a DC-based nonprofit opposing cannabis reform, has vowed to file suit “immediately,” calling the order “illegal in multiple ways.” SAM previously participated as an opponent in the DEA’s administrative hearings and has intervened in other cannabis-related litigation. 

Challengers are likely to make several arguments. They may contend that the DOJ exceeded its authority by issuing the order while an ongoing rescheduling process remained pending and that its reliance on international treaty compliance is flawed. Following the US Supreme Court’s June 2024 decision in Loper Bright overruling Chevron deference, challengers are also likely to argue that the order exceeds or misreads 21 U.S.C. § 811(d)(1) by using treaty‑compliance authority to place only FDA‑approved products and state‑licensed medical marijuana into Schedule III. They may further assert that the DOJ and DEA did not adequately explain the distinction between medical and adult‑use line marijuana in light of HHS’ August 2023 evaluation, which recommended Schedule III for “marijuana” broadly, that the bifurcation of marijuana into medical and non-medical channels outside FDA purview is statutorily incoherent and arbitrary and capricious under the Administrative Procedure Act.

The DOJ is likely to respond that Section 811(d)(1) authorizes scheduling by order to carry out the Single Convention “without regard” to Sections 811(a) through (b), and that import and export permit controls and Article 23 compliance remain intact. The DOJ will also likely argue that the medical and adult‑use line reasonably confines federal authorization to medical and scientific channels. The DC Circuit’s NORML decision, which the order itself references, also required HHS input in certain Section 811(d)(1) circumstances, and the DOJ will argue, is satisfied by HHS’ 2023 evaluation. 

Criminal and Collateral Consequences

The final rule does not purport to apply retroactively, and recreational activities remain illegal under federal law. While medical use by prescription would be lawful for FDA‑approved drugs dispensed in compliance with DEA requirements, most state dispensary products are not FDA approved, and criminal and collateral consequences generally persist absent additional legal changes. 

Recommended Next Steps for Affected Businesses

Affected businesses and stakeholders should consider the following actions:

• Medical cannabis operators should consult promptly with tax advisors on Section 280E implications, including current-year tax positions, the possibility of amending prior-year returns, and financial reporting.

• State-licensed operators should begin preparing for DEA registration and Schedule III compliance obligations, including recordkeeping, security, disposal, and labeling under the expedited pathway.

• Dual-license operators should begin to assess how the Section 280E apportionment framework may apply across their medical and adult-use activities.

• Adult-use operators should monitor the June 29 DEA hearing, consider whether to participate as an interested party, and plan for the possibility of broader rescheduling.

• All operators should review state law interactions with the new federal framework and monitor legal challenges that may affect the order’s scope or durability. Operators should also recall that state and local tax laws continue to apply, including state laws that may limit certain deductions for marijuana businesses regardless of federal scheduling. 

• Applicants targeting interim operations authority should calendar the 60‑day filing window, which begins April 29, and align state licensure scope with intended federal registrations.

Final Takeaway

The DOJ’s reclassification of medical marijuana to Schedule III marks a historic shift in federal cannabis policy. It delivers immediate Section 280E tax relief for state-licensed medical operators while leaving adult-use cannabis under Schedule I restrictions. State-licensed operators should prepare now for DEA registration and the compliance obligations that come with Schedule III status, including recordkeeping, security protocols, and labeling requirements. Dual-license operators face the added complexity of apportioning expenses between medical and adult-use activities. And with legal challenges anticipated and broader rescheduling hearings set for this summer, the regulatory landscape remains in flux. Businesses should act quickly, consult with tax and compliance advisors, and stay engaged as these developments continue to unfold.

ArentFox Schiff’s Cannabis group will continue to track developments. For further information on regulatory changes and research initiatives in the medical marijuana and CBD sectors, contact one of the authors or the AFS attorney with whom you normally work.