White Paper · Cannabis Tax · Schedule III

Schedule III and §280E: What the April 28, 2026 Rule Changed and What It Left Open

DEA’s April 28, 2026 final rule moved state medical marijuana and FDA-approved marijuana products to Schedule III, and DEA said covered licensees are no longer subject to §280E. The rule is narrower than “rescheduling,” it does not decide anyone’s tax liability, and Treasury guidance is still pending.

By Lincoln Square Law · 8-minute read

The short answer

Section 280E of the Internal Revenue Code denies deductions and credits to a business that consists of trafficking in controlled substances in Schedule I or II (26 U.S.C. 280E). On April 28, 2026, the Drug Enforcement Administration placed marijuana, marijuana extract, and naturally derived delta-9 THC in Schedule III when they are in an FDA-approved product or subject to a state medical marijuana license (91 Fed. Reg. 22714, adding 21 C.F.R. 1308.13(g)). DEA said that state licensees covered by the rule will no longer be subject to the section 280E disallowance. DEA also said that nothing in the rule determines anyone’s federal tax liability.

That leaves three groups in different positions. Activity under a state medical marijuana license is covered by the rule from April 28. Adult-use marijuana and other marijuana outside the rule remain in Schedule I, so section 280E continues to apply under its terms. A business that does both has to separate them in fact, not only on paper. This briefing covers the scheduling change and the open tax questions it creates. Our companion briefing on how section 280E works covers the statute, cost of goods sold, and the case law that applies to any business still subject to it.

What the rule moved, and what stayed in Schedule I

The final rule was published and took effect on April 28, 2026. It covers three substances, each only when it is in an FDA-approved product or subject to a state medical marijuana license: marijuana, marijuana extract, and naturally derived delta-9 THC (21 C.F.R. 1308.13(g)(2)-(4)). Marijuana outside those categories remains in Schedule I. DEA states that synthetically derived THC remains in Schedule I and that the rule does not affect hemp.

The rule did not reschedule adult-use marijuana. On the same day, DEA noticed a formal hearing on its 2024 proposal to move marijuana generally to Schedule III, set to run from June 29 to July 15, 2026 (91 Fed. Reg. 22777). As of this writing, we have not located a final rule from that proceeding. Until one is published, the adult-use market remains in Schedule I, and section 280E’s scope for that market is unchanged.

The federal registration conditions that come with Schedule III

Schedule III status is not only a tax event. The rule created a registration pathway for state medical marijuana licensees as manufacturers, distributors, or dispensers (21 C.F.R. 1301.13(k)). A state license is conclusive evidence of state authorization for registration, and a DEA registration is automatically suspended if the state license is suspended, revoked, or expires. DEA said it would make every effort to process applications filed within 60 days of publication within six months, and that applicants who filed in that window could operate under their state license while the application was pending. Registrations do not authorize non-medical activity.

The rule ties the tax statement to licensees covered by the rule. It does not spell out how a licensee’s DEA registration status affects the tax result. A business taking a post-April 28 tax position should be able to show its state medical license, its DEA registration or pending application, and the activity that produced the revenue. Whether a missed or denied registration changes the tax answer is a question for tax counsel, and the file should be built so that question can be answered.

What DEA said about §280E, and what it did not decide

DEA’s preamble makes three tax statements. Covered state licensees will no longer be subject to the section 280E disallowance. The Administrator encourages the Secretary of the Treasury to consider retrospective relief for taxable years in which a licensee operated under a state medical marijuana license. And nothing in the rule constitutes a determination regarding federal tax liability, so licensees should consult tax counsel (91 Fed. Reg. 22714).

The first statement follows from the statute, which applies only to Schedule I and II substances. The second is a request to Treasury, not a grant of relief. The third is a reminder that the IRS, not DEA, administers the tax law. A DEA preamble explains a scheduling decision. It is not tax authority, and it does not bind the IRS on how to apply section 280E to a particular taxpayer or year.

Questions the rule leaves to Treasury and the IRS

The 2026 taxable year. The rule took effect on April 28, 2026, partway through most taxpayers’ years. Section 280E disallows deductions for amounts “paid or incurred during the taxable year” in carrying on a covered trade or business. How a calendar-year medical operator should treat January 1 through April 27 is not answered by the rule.

Prior years. DEA asked Treasury to consider retrospective relief, which signals that none exists today. Positions on returns already filed rest on the law in effect for those years.

Mixed operations. The rule does not say how a single entity with medical and adult-use activity should allocate costs between the two.

Treasury and the IRS have listed “Guidance under §280E” as item 9 under “Other Priorities” in their 2026-2027 Priority Guidance Plan, released September 29, 2026. The plan states that its projects will be the focus of effort during the plan year and that it does not set any deadline for completing them. As of this writing, we have not located published IRS guidance on these questions.

State income tax in Illinois and Missouri

Both Illinois and Missouri already provide a state income tax subtraction for amounts that section 280E disallows federally, so for businesses in those states the April 28 rule changes mainly the federal return. Our section 280E briefing identifies the Illinois Schedule M line and the Missouri return instruction, and what each requires.

Building the evidence for a post-April 28 position

A tax position is only as good as the facts behind it. For each entity, record the state licenses it holds and whether each is medical or adult-use, its DEA registration status and dates, the activities it conducts under each license, and how revenue, inventory, and costs flow among them. Keep the pre-April 28 section 280E workpapers intact, and start the post-rule records on a dated basis. Point-of-sale coding, inventory transfers, payroll, and facility use should support the same division that the tax workpapers describe.

Two cautions apply. First, do not let a cash-tax forecast, a covenant calculation, or a board deck assume that the whole enterprise left section 280E behind. Adult-use operations did not. Second, do not create separations at year end that the operations never had. The tax result will follow what the business actually did.

Transactions closing in 2026

Buyers and sellers of cannabis businesses should address the rule in the documents. Representations about tax status should describe which entities and activities rely on the April 28 rule. Tax covenants and indemnities should allocate pre-closing section 280E exposure and the benefit of any future retrospective relief, and they should say who controls amended returns and audits. A seller that expects future relief should not assume the purchase agreement will deliver it without saying so.

Developments to monitor

Watch for IRS or Treasury guidance under section 280E, any final rule from DEA’s broader rescheduling hearing, any challenge to the April 28 rule, and changes to the Illinois or Missouri subtractions. Each would change the analysis in a different way, and none should be assumed before it is published.

What to ask tax counsel and us

Which of our entities and activities are within the April 28 rule, and what evidence shows it? Is our DEA registration in place or pending? How will we treat 2026 before and after April 28 until the IRS speaks? What records are we keeping for possible retrospective relief? Do our transaction documents allocate section 280E exposure and any future refund?