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Federal cannabis policy is entering 2026 in a “split-screen” posture: marijuana appears to be moving toward a less restrictive federal status, while hemp is facing a major federal contraction (covered in our next installment, Cannabis in 2026 – Part II: Hemp Tightening in 2026—The Compliance Cliff, CBD Carve-Out Signals, and Business Risk). For cannabis operators, investors, and counsel, the immediate task is practical: separate what a Schedule III move would change (materially) from what it would not (often misunderstood). This is a rapidly evolving area. The observations below reflect our current predictions based on the existing statutory and regulatory framework, the Administration’s stated priorities, and likely implementation dynamics. These forecasts may change as the U.S. Department of Justice (DOJ) and U.S. Drug Enforcement Agency (DEA) action, agency guidance, litigation, or congressional activity develops
1. The Rescheduling Signal—And The Legal Reality
On December 18, 2025, President Trump issued an Executive Order directing the Attorney General to move marijuana from Schedule I to Schedule III “in the most expeditious manner in accordance with Federal law,” referencing 21 U.S.C. § 811 (the CSA’s scheduling provision). Whatever one’s policy view, this is a significant federal signal: the Administration is no longer treating rescheduling as a slow-walked policy discussion, but as a priority deliverable.
On January 6, 2026, DEA publicly clarified a point that the industry often glosses over: even with an Executive Order, the rescheduling matter remains pending and must still proceed through required administrative steps before any schedule change becomes legally effective.
The Executive Order is direction and momentum— the road ahead is still long. The “real” legal event is still a final agency action (typically a final rule), supported by a defensible administrative record. Here’s what we know and what we anticipate ahead.
2. What The Executive Order Suggests Beyond Rescheduling: CBD Access And Research
Although the headline is Schedule III, the Executive Order includes several related directives that matter to cannabis and adjacent industries:
Even if a Schedule III move is the primary operational event for state-licensed operators, the Administration’s posture on research and CBD access can influence (i) investment strategy, (ii) healthcare-adjacent partnerships, and (iii) the regulatory tone agencies adopt as they revisit cannabis policy. Tracking these developments is essential for cannabis businesses and ancillary services providers.
3. The Likely Procedural Lanes (And Why Timing Is Uncertain)
DOJ has more than one plausible path to complete rescheduling. Each path carries different timing and litigation exposure.
(a) Complete the existing rulemaking process: One route is to finish the administrative process already in motion and issue a final rule placing marijuana in Schedule III. This approach tends to be the most institutionally familiar, but it can be slower and invites procedural challenges.
(b) Use CSA statutory authority under 21 U.S.C. § 811(d)(1): Another route—often discussed by policy commentators and lawyers—is reliance on the Attorney General’s authority under 21 U.S.C. § 811(d)(1). Under 21 U.S.C. § 811(d)(1), the Attorney General can bypass the standard drug scheduling process to meet international treaty obligations. This allows the DEA to immediately schedule a drug required by treaties like the 1961 Single Convention without the typical scientific evaluations or public input. Advocates of this approach view it as potentially faster and less vulnerable to certain procedural delays, but it may also face novel challenges precisely because it is not the pathway the public expects.
(c) Resume the administrative hearing track (unlikely): A third possibility would be to restart or continue a stalled hearing process. The DEA’s administrative process for rescheduling marijuana stalled in early 2025 following canceled merit hearings and a stay on all proceedings due to allegations of bias and improper communications. The process remains frozen pending a ruling on an interlocutory appeal concerning potential conflicts of interest among DEA leadership. Further complicating the situation, the presiding Chief Administrative Law Judge overseeing the record retired in July 2025, leaving the DEA without a judge for future hearings. As a practical matter, this lane appears less likely.
The timing on rescheduling will turn on which lane DOJ chooses, how quickly agencies build a litigation-ready record, and whether courts entertain requests that affect effective dates. And, even if the government ultimately prevails in moving through these hurdles, litigation can shape business planning and transaction timetables. Indeed, in a policy shift of this magnitude, litigation is not a side plot. It is one of the expected milestones. It is likely that we will see litigation targeting: (1) procedural sufficiency (notice-and-comment issues, record adequacy); (2) substantive statutory interpretation (CSA factors, scheduling criteria); (3) agency reasoning (whether findings are supported and coherent).
Thus, we anticipate the industry may experience a “two-track” period—(i) operational planning in anticipation of Schedule III, and (ii) uncertainty about when finality arrives and whether any court action affects implementation timing.
4. The Biggest Business Impact: Likely 280E Relief
For state-legal cannabis operators, the most concrete and widely anticipated effect of Schedule III is the potential elimination of Internal Revenue Code § 280E, which disallows ordinary business deductions for businesses trafficking in Schedule I or II substances.
If marijuana moves to Schedule III, § 280E should no longer apply—potentially allowing deductions for ordinary and necessary expenses such as payroll and benefits, rent and facilities costs, marketing and advertising (within state rules), professional fees (legal, accounting, consulting), and many ordinary overhead expenses historically disallowed for plant-touching businesses. For many operators, tax posture has been a dominant constraint on profitability, pricing flexibility, and access to capital. Removal of 280E can materially affect cash flow and reinvestment capacity, valuation (normalized earnings may change significantly), M&A and financing, and operational planning.
Even though Schedule III does not legalize state markets federally, a federal reclassification can still influence adjacent decision-making. Service providers and counterparties may re-evaluate risk tolerance for payments, insurance underwriting, leasing, and certain professional services). Likewise, institutional stakeholders may treat Schedule III as a “de-risking signal,” even if legal risk remains.
5. What Schedule III Does Not Fix (And Why Expectations Should Remain Measured)
Rescheduling is meaningful, but it is not federal legalization and not a turnkey pathway for state markets. Even at Schedule III:
(a) Federal illegality persists for non–FDA-approved cannabis: State-compliant cannabis activity would still exist in tension with federal law unless and until Congress creates a federal framework or federal agencies implement a lawful distribution model for non-FDA products (which is not what rescheduling does by itself).
(b) No interstate commerce: Rescheduling alone does not authorize state-licensed operators to ship product across state lines. Multi-state businesses should continue to plan for state-by-state compliance, separate supply chains, and localized operations.
(c) Banking improves at the margins—but does not “solve”: Schedule III may increase comfort for some institutions, but core compliance issues tied to federal illegality and AML frameworks can remain without legislative change. Access may become more available, but not uniformly—and not necessarily on terms the industry expects.
(d) Bankruptcy and federal IP constraints remain difficult: Bankruptcy access and trademark protections typically depend on lawful use in commerce under federal law. A Schedule III move alone may not deliver predictable outcomes in these areas for state-licensed businesses.
(e) Research is likely to improve—but not without friction: A Schedule III classification strengthens the federal acknowledgment of accepted medical use and may reduce certain barriers. Still, research expansion often depends on implementation details: agency guidance, institutional risk tolerance, and the regulatory scaffolding around cannabis-related studies.
A secondary watch item: states may view federal tax relief as a reason to reassess their own cannabis tax structures. Operators should not assume that improved federal treatment automatically means total tax burden decreases. See our future installment, Cannabis in 2026 – Part III: What Schedule III Could Mean for State-Legal Cannabis Operations: Real Upside, Persistent Friction for more on potential state regulatory scheme impacts.
6. Planning Takeaway
Treat 2026 as a “change-in-law” year: model post-280E economics, stress-test contracts and disclosures for shifting tax and regulatory assumptions, and maintain diligence-ready compliance documentation as the rulemaking and litigation landscape evolves. The Sheppard Mullin Cannabis Industry Team can help evaluate timing scenarios, structure transactions and tax planning around rescheduling, and build compliance and business strategies even with federal uncertainty—please reach out if you would like support with implementation planning, diligence, or policy tracking.
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Under certain state laws, the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.
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Find Your Next Job !
Federal cannabis policy is entering 2026 in a “split-screen” posture: marijuana appears to be moving toward a less restrictive federal status, while hemp is facing a major federal contraction (covered in our next installment, Cannabis in 2026 – Part II: Hemp Tightening in 2026—The Compliance Cliff, CBD Carve-Out Signals, and Business Risk). For cannabis operators, investors, and counsel, the immediate task is practical: separate what a Schedule III move would change (materially) from what it would not (often misunderstood). This is a rapidly evolving area. The observations below reflect our current predictions based on the existing statutory and regulatory framework, the Administration’s stated priorities, and likely implementation dynamics. These forecasts may change as the U.S. Department of Justice (DOJ) and U.S. Drug Enforcement Agency (DEA) action, agency guidance, litigation, or congressional activity develops
1. The Rescheduling Signal—And The Legal Reality
On December 18, 2025, President Trump issued an Executive Order directing the Attorney General to move marijuana from Schedule I to Schedule III “in the most expeditious manner in accordance with Federal law,” referencing 21 U.S.C. § 811 (the CSA’s scheduling provision). Whatever one’s policy view, this is a significant federal signal: the Administration is no longer treating rescheduling as a slow-walked policy discussion, but as a priority deliverable.
On January 6, 2026, DEA publicly clarified a point that the industry often glosses over: even with an Executive Order, the rescheduling matter remains pending and must still proceed through required administrative steps before any schedule change becomes legally effective.
The Executive Order is direction and momentum— the road ahead is still long. The “real” legal event is still a final agency action (typically a final rule), supported by a defensible administrative record. Here’s what we know and what we anticipate ahead.
2. What The Executive Order Suggests Beyond Rescheduling: CBD Access And Research
Although the headline is Schedule III, the Executive Order includes several related directives that matter to cannabis and adjacent industries:
Even if a Schedule III move is the primary operational event for state-licensed operators, the Administration’s posture on research and CBD access can influence (i) investment strategy, (ii) healthcare-adjacent partnerships, and (iii) the regulatory tone agencies adopt as they revisit cannabis policy. Tracking these developments is essential for cannabis businesses and ancillary services providers.
3. The Likely Procedural Lanes (And Why Timing Is Uncertain)
DOJ has more than one plausible path to complete rescheduling. Each path carries different timing and litigation exposure.
(a) Complete the existing rulemaking process: One route is to finish the administrative process already in motion and issue a final rule placing marijuana in Schedule III. This approach tends to be the most institutionally familiar, but it can be slower and invites procedural challenges.
(b) Use CSA statutory authority under 21 U.S.C. § 811(d)(1): Another route—often discussed by policy commentators and lawyers—is reliance on the Attorney General’s authority under 21 U.S.C. § 811(d)(1). Under 21 U.S.C. § 811(d)(1), the Attorney General can bypass the standard drug scheduling process to meet international treaty obligations. This allows the DEA to immediately schedule a drug required by treaties like the 1961 Single Convention without the typical scientific evaluations or public input. Advocates of this approach view it as potentially faster and less vulnerable to certain procedural delays, but it may also face novel challenges precisely because it is not the pathway the public expects.
(c) Resume the administrative hearing track (unlikely): A third possibility would be to restart or continue a stalled hearing process. The DEA’s administrative process for rescheduling marijuana stalled in early 2025 following canceled merit hearings and a stay on all proceedings due to allegations of bias and improper communications. The process remains frozen pending a ruling on an interlocutory appeal concerning potential conflicts of interest among DEA leadership. Further complicating the situation, the presiding Chief Administrative Law Judge overseeing the record retired in July 2025, leaving the DEA without a judge for future hearings. As a practical matter, this lane appears less likely.
The timing on rescheduling will turn on which lane DOJ chooses, how quickly agencies build a litigation-ready record, and whether courts entertain requests that affect effective dates. And, even if the government ultimately prevails in moving through these hurdles, litigation can shape business planning and transaction timetables. Indeed, in a policy shift of this magnitude, litigation is not a side plot. It is one of the expected milestones. It is likely that we will see litigation targeting: (1) procedural sufficiency (notice-and-comment issues, record adequacy); (2) substantive statutory interpretation (CSA factors, scheduling criteria); (3) agency reasoning (whether findings are supported and coherent).
Thus, we anticipate the industry may experience a “two-track” period—(i) operational planning in anticipation of Schedule III, and (ii) uncertainty about when finality arrives and whether any court action affects implementation timing.
4. The Biggest Business Impact: Likely 280E Relief
For state-legal cannabis operators, the most concrete and widely anticipated effect of Schedule III is the potential elimination of Internal Revenue Code § 280E, which disallows ordinary business deductions for businesses trafficking in Schedule I or II substances.
If marijuana moves to Schedule III, § 280E should no longer apply—potentially allowing deductions for ordinary and necessary expenses such as payroll and benefits, rent and facilities costs, marketing and advertising (within state rules), professional fees (legal, accounting, consulting), and many ordinary overhead expenses historically disallowed for plant-touching businesses. For many operators, tax posture has been a dominant constraint on profitability, pricing flexibility, and access to capital. Removal of 280E can materially affect cash flow and reinvestment capacity, valuation (normalized earnings may change significantly), M&A and financing, and operational planning.
Even though Schedule III does not legalize state markets federally, a federal reclassification can still influence adjacent decision-making. Service providers and counterparties may re-evaluate risk tolerance for payments, insurance underwriting, leasing, and certain professional services). Likewise, institutional stakeholders may treat Schedule III as a “de-risking signal,” even if legal risk remains.
5. What Schedule III Does Not Fix (And Why Expectations Should Remain Measured)
Rescheduling is meaningful, but it is not federal legalization and not a turnkey pathway for state markets. Even at Schedule III:
(a) Federal illegality persists for non–FDA-approved cannabis: State-compliant cannabis activity would still exist in tension with federal law unless and until Congress creates a federal framework or federal agencies implement a lawful distribution model for non-FDA products (which is not what rescheduling does by itself).
(b) No interstate commerce: Rescheduling alone does not authorize state-licensed operators to ship product across state lines. Multi-state businesses should continue to plan for state-by-state compliance, separate supply chains, and localized operations.
(c) Banking improves at the margins—but does not “solve”: Schedule III may increase comfort for some institutions, but core compliance issues tied to federal illegality and AML frameworks can remain without legislative change. Access may become more available, but not uniformly—and not necessarily on terms the industry expects.
(d) Bankruptcy and federal IP constraints remain difficult: Bankruptcy access and trademark protections typically depend on lawful use in commerce under federal law. A Schedule III move alone may not deliver predictable outcomes in these areas for state-licensed businesses.
(e) Research is likely to improve—but not without friction: A Schedule III classification strengthens the federal acknowledgment of accepted medical use and may reduce certain barriers. Still, research expansion often depends on implementation details: agency guidance, institutional risk tolerance, and the regulatory scaffolding around cannabis-related studies.
A secondary watch item: states may view federal tax relief as a reason to reassess their own cannabis tax structures. Operators should not assume that improved federal treatment automatically means total tax burden decreases. See our future installment, Cannabis in 2026 – Part III: What Schedule III Could Mean for State-Legal Cannabis Operations: Real Upside, Persistent Friction for more on potential state regulatory scheme impacts.
6. Planning Takeaway
Treat 2026 as a “change-in-law” year: model post-280E economics, stress-test contracts and disclosures for shifting tax and regulatory assumptions, and maintain diligence-ready compliance documentation as the rulemaking and litigation landscape evolves. The Sheppard Mullin Cannabis Industry Team can help evaluate timing scenarios, structure transactions and tax planning around rescheduling, and build compliance and business strategies even with federal uncertainty—please reach out if you would like support with implementation planning, diligence, or policy tracking.
More Upcoming Events
Sign Up for any (or all) of our 25+ Newsletters
You are responsible for reading, understanding, and agreeing to the National Law Review’s (NLR’s) and the National Law Forum LLC’s Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free-to-use, no-log-in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates, or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys, or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.
Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com intended to be a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional. NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us.
Under certain state laws, the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.
The National Law Review – National Law Forum LLC 2070 Green Bay Rd., Suite 178, Highland Park, IL 60035 Telephone (708) 357-3317 or toll-free (877) 357-3317. If you would like to contact us via email please click here.
Copyright ©2026 National Law Forum, LLC