The Executive Order to Reschedule Cannabis: Implications for Cannabis Businesses and the Financial Institutions Serving Them

On January 20, 2025, President Trump signed an executive order directing federal agencies to initiate the process of rescheduling cannabis from Schedule I to Schedule III under the Controlled Substances Act. This move, while not an immediate change in law, signals a significant shift in federal cannabis policy and carries far-reaching implications for cannabis businesses and the financial institutions that serve them.

What Rescheduling Means

Rescheduling cannabis from Schedule I to Schedule III would fundamentally change the regulatory framework surrounding the plant. Schedule I substances are classified as having no accepted medical use and a high potential for abuse. Schedule III substances, by contrast, are recognized as having accepted medical uses and a lower potential for abuse relative to Schedule I and II substances.

Importantly, rescheduling would not legalize cannabis at the federal level. Cannabis would remain a controlled substance, but the regulatory and tax implications would change significantly.

Tax Implications: The End of 280E?

Perhaps the most immediate and impactful consequence of rescheduling would be the elimination of the Section 280E tax burden. Currently, Section 280E of the Internal Revenue Code prevents businesses that traffic in Schedule I or Schedule II controlled substances from deducting ordinary business expenses. This results in effective tax rates that can exceed 70% for some cannabis businesses.

If cannabis is rescheduled to Schedule III, Section 280E would no longer apply to cannabis businesses, allowing them to deduct ordinary and necessary business expenses like any other legal business. This change alone could dramatically improve the financial viability of cannabis operations across the country.

Implications for Financial Institutions

Rescheduling could also significantly impact the banking landscape for cannabis businesses. While the SAFE Banking Act has yet to pass, rescheduling would reduce the regulatory risk associated with serving cannabis businesses, potentially encouraging more financial institutions to enter the space.

Financial institutions currently serving cannabis businesses should review their compliance programs and risk assessments in light of potential rescheduling. Those considering entering the cannabis and hemp banking space should begin developing compliance frameworks now to be ready when the regulatory environment shifts.

What Cannabis Businesses Should Do Now

While rescheduling is not yet a certainty, cannabis businesses should take proactive steps to prepare:

• Review and update tax strategies with qualified tax attorneys and accountants
• Ensure financial records are well-organized and audit-ready
• Evaluate banking relationships and explore additional financial services options
• Review compliance programs to ensure alignment with evolving regulations
• Consider intellectual property protection strategies as the market becomes more competitive

Conclusion

The executive order to reschedule cannabis represents a watershed moment for the industry. While the full impact will depend on the details of implementation and any accompanying legislation, the direction of travel is clear. Cannabis businesses and financial institutions that prepare now will be best positioned to capitalize on the opportunities that rescheduling presents.

For guidance on how rescheduling may affect your cannabis business or financial institution, contact Cogent Law today.