Cannabis Reclassified to Schedule III by Executive Order

President Trump has issued an Executive Order directing the reclassification of marijuana from a Schedule I controlled substance to a schedule III controlled substance under the Controlled Substances Act. The EO does not legalize cannabis federally.  Instead, it acknowledges that cannabis has some potential health benefits and should be treated like a medicine along the lines of Tylenol with codeine and thereby removes the harsh criminal penalties under Schedule I.  Because of the rescheduling, cannabis will be subject to the Food, Drugs and Cosmetics Act and will need to received FDA approval to be marketed as Schedule III drug.  

Forty states and all US territories and the District of Columbia have legalized cannabis for adult and/or medical purposes, resulting in a state-by-state cannabis market.  This structure will not change.  State-licensed cannabis businesses operating in this structure are not going to seek FDA approval for cannabis, and the FDA is not likely to enforce violations of the FDCA against such cannabis operators.  Thus, as a practical matter, the change from Schedule I to III will have little effect on how cannabis and cannabis products are grown, manufactured, sold and used in the US.

However, the re-scheduling of cannabis should have a significant impact on the viability of the US cannabis market, removing a key barrier to its growth and success, IRS Tax Code Section 280E. That section of the Tax Code, which prohibits businesses involved with a Schedule I or II drug from deducting normal business expenses to now do so, potentially freeing up capital and improving balance sheets.  Likewise, the change should result in access to traditional commercial banking services and financings and increase the pool of private investors who were concerned about investing in a Schedule I controlled substance.  These pro-business effects of the reclassification could lead to lower prices for consumers as cannabis companies become financially healthier.

The change comes at a critical time for the cannabis industry, which has endured years of dwindling returns, depressed assets, and huge tax liabilities. 

The reclassification is not immediate.  The EO directs AG Bondi to conclude the reclassification process that began in 2024 under a Biden Administration directive.  That process was derailed early on and stalled.  The EO means it will be revived and concluded by reclassifying cannabis to Schedule III.

Attorneys in Pashman Stein's Cannabis & Hemp Law practice have worked closely with industry stakeholders on reclassification initiatives and are proud to partner with the cannabis industry in capitalizing on this watershed event.