President Donald Trump has signed an Executive Order directing federal agencies to finalize rulemaking process to reclassify cannabis from Schedule I to Schedule III under the Controlled Substances Act (CSA).[1] Schedule III substances are recognized as having accepted medical use and a lower potential for abuse than Schedule I or II drugs. While the action stops short of legalizing cannabis at the federal level, it represents a significant shift in federal cannabis policy and carries meaningful implications for the regulated cannabis and hemp industries.
The executive order builds on findings issued by the U.S. Department of Health and Human Services in 2023 concluding that cannabis has recognized medical uses and poses less risk than other Schedule I substances.[2] This determination was based in part on findings that more than 30,000 licensed healthcare practitioners across 43 United States jurisdictions are authorized to recommend the medical use of marijuana for more than 6 million registered patients to treat at least 15 medical conditions.[3] It was also based on a finding by the FDA of credible scientific support to substantiate the use of cannabis in the treatment of pain, anorexia related to certain medical conditions, and nausea and vomiting induced by chemotherapy. The order further acknowledges that decades of federal drug control policy have failed to account for cannabis’s recognized medical uses, resulting in impeded research and limited clinical guidance for patients and providers.
The order instructs the Attorney General to act expeditiously to complete the rulemaking process which began in 2022 under the Biden administration. In May 2024, the Department of Justice issued a proposed rule to reschedule marijuana to Schedule III, but the process has been stalled since the beginning of this year due to procedural disputes, allegations of misconduct at the DEA, and general administrative delays.[4] The executive action appears to remove what many viewed as the primary cause of the delays and obstacle to rescheduling—the political barrier.
Importantly, however, the order does not legalize recreational cannabis and does not override existing state regulatory frameworks. Businesses should also note that rescheduling alone does not eliminate compliance, enforcement, or licensing risks, nor does it guarantee expanded access to medical research without further regulatory reform.
If finalized through the required administrative process, rescheduling would have significant tax implications for state-legal cannabis operators, many of which currently face effective federal tax rates that can be as high as 70%. Rescheduling would remove the application of Internal Revenue Code Section 280E, which prohibits business associated with Schedule I or II controlled substances from deducting “ordinary and necessary” business expenses. If cannabis is moved to Schedule III, § 280E would no longer apply by its terms, allowing cannabis businesses to deduct ordinary operating expenses like payroll, rent, marketing, insurance, professional fees, and other administrative costs in the same manner as other lawful businesses. This would materially affect cash flow, valuations, transaction structuring, and long-term planning across the industry and will likely lead to cannabis operator’s access to more mainstream sources of capital and banking
The executive order also addresses the hemp-derived cannabinoid market, an area that has faced increasing regulatory uncertainty and recent legislative pressure. It directs federal agencies, in coordination with Congress, to explore pathways to facilitate patient access to appropriate non-psychoactive hemp-derived cannabinoid products, including cannabidiol (CBD). The order notes that a significant portion of U.S. adults, including seniors and patients managing chronic pain, report using CBD and other hemp-derived products, and that clinical studies suggest potential therapeutic benefits for certain conditions. The stated policy is for the Administration to increase medical cannabis and CBD research to better inform patients and doctors.
Additionally, the order directs the Executive Branch to work with Congress to update the statutory definition of final hemp-derived cannabinoid products in order to preserve access to appropriate full-spectrum CBD products, which may be treated as marijuana/cannabis under the Controlled Substances Act when section 781 of Public Law 119-37 (enacted as part of the Appropriations and Extensions Act) goes into effect in November of 2026. [5] This law, which redefines “hemp” by applying the 0.3% threshold to total THC (including Delta-8, Delta-10, and THCA) rather than 0.3% delta-9 THC by dry weight as previously defined under the 2018 Farm Bill,[6] currently threatens to wipe billions of dollars from the economy by effectively banning most hemp-derived THC products from the market.
With administrative rulemaking still required and potential legal and political challenges ahead, cannabis and hemp operators should closely monitor developments and evaluate how a potential Schedule III classification could affect tax planning, corporate structuring, investment strategy, transactions, and regulatory strategy.
How Frier Levitt Can Help
The authors of this article are also the authors of the recently published Legal Guide to the Business of Cannabis and Hemp (PLI Press, 2025) and can provide expert advisory support to companies in the cannabis and hemp sectors. Frier Levitt will continue to closely monitor federal and state developments impacting the cannabis and hemp industries, including rescheduling, tax implications, regulatory enforcement, and access to medical and hemp-derived products. As the legal and regulatory landscape evolves, our attorneys remain focused on helping operators, investors, medical cannabis providers, and ancillary businesses navigate risk, compliance, and strategic planning. For questions regarding how potential rescheduling or related federal actions may affect your cannabis or hemp business, please contact a member of Frier Levitt’s Cannabis, Hemp, and Life Sciences team.
[1] Increasing Medical Marijuana and Cannabidiol Research, Exec. Order (Dec. 18, 2025).
[2] Guilherme Ferrari Faviero & Edgar J. Asebey, The Rescheduling of Cannabis: Government Scientists Speak—Will DEA Listen? 36 Health L. 5 (Feb. 2024).
[3] See Executive Order.
[4] “DEA Says Marijuana Rescheduling Appeal Process Remains Stalled Under New Administrator Who Pledged To Prioritize The Issue,” Marijuana Moment (October 7, 2025).
[5] H.R.5371 – Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026, 119th Congress (2025-2026).
[6] The 2018 Farm Bill’s Hemp Definition and Legal Challenges to State Laws Restricting Certain THC Products, Congressional Research Service, R48637 (August 20, 2025).
Senior Associate