DEA Recommends Cannabis Rescheduling: Developments and Implications for the Industry

The state-licensed cannabis industry has been operating under significant constraints due to cannabis’s classification as a Schedule I substance under the federal Controlled Substances Act of 1970. This categorization, which groups cannabis with drugs like heroin and LSD, has faced growing criticism as an increasing number of states legalize cannabis for medical and recreational purposes. However, the industry may soon experience a major shift, as the Drug Enforcement Administration (DEA) moves to reschedule cannabis to Schedule III. This decision follows a recommendation from the Department of Health & Human Services (HHS), which is supported by scientific evidence reviewed by the FDA.

It’s important to note that the rescheduling process will take time before it officially takes effect. After the White House reviews the DEA proposal, a proposed rule will be published in the Federal Register. A public-comment period will follow before the proposed rule can become final. The process will almost certainly give rise to litigation and it remains unclear how long the process will take.

Impact on Taxation: Removal from Section 280E

One of the most significant effects of this rescheduling would be the removal of cannabis from the purview of I.R.C. Section 280E. This tax code provision has been a substantial obstacle for state-licensed cannabis businesses, preventing them from deducting many ordinary business expenses when calculating their taxable income. Under 280E, cannabis companies can only deduct the Cost of Goods Sold, leading to considerably higher tax burdens compared to businesses in other industries. With the rescheduling, state-licensed cannabis businesses would be able to deduct ordinary business expenses, creating a more equitable playing field and enabling them to allocate more of their revenues toward growth and expansion.

Challenges in Banking Access

Access to banking services has been another long-standing challenge for the state-licensed cannabis industry due to the federal prohibition on cannabis. Many banks have avoided working with cannabis businesses, concerned about potential legal and regulatory consequences. While the rescheduling to Schedule III might encourage more risk-tolerant banks to engage with the industry, many will likely remain hesitant as long as cannabis remains federally illegal. To comprehensively address these banking hurdles, federal legislation like the SAFER Banking Act is necessary. This act would provide protections for federally-regulated financial institutions such as banks that serve the cannabis industry in states where it is legal. The rescheduling could potentially increase legislative support for such measures, which would support the cannabis industry’s long-term financial stability and growth.

Limitations on Legal Rights and Remedies

Even with the anticipated rescheduling, state-licensed cannabis businesses will continue to encounter restrictions on their federal legal rights and remedies. Due to the ongoing federal prohibition on cannabis, state-sanctioned businesses in the industry will still face difficulties in establishing and protecting intellectual property rights, such as trademarks. Furthermore, access to bankruptcy courts will likely remain restricted, although some courts have recently demonstrated a willingness to allow cannabis-related businesses that are not directly involved in cannabis operations to utilize bankruptcy proceedings.


The expected rescheduling of cannabis to Schedule III will have notable implications for state-sanctioned cannabis businesses. The removal of cannabis from I.R.C. Section 280E will provide significant tax relief for state-licensed cannabis operators, and the possibility of increased banking access could enhance the industry’s financial stability and growth potential. Nevertheless, cannabis companies will continue to face certain limitations stemming from the persistent federal prohibition of cannabis. As the legal landscape evolves, it is essential for cannabis businesses to remain informed about industry developments and to collaborate with legal professionals who can offer guidance and support in navigating the shifting regulatory environment.

If you have any questions or require assistance, please contact Sean P. Gallagher.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Sean P. GallagherSean P. Gallagher is an attorney at Fraser Trebilcock with experience in the highly regulated cannabis industry, working with local and state officials to advance client interests and to help mitigate risks involved and increase opportunities. You can reach him at 517.377.0820 or at

Five Stories That Matter in Michigan This Week – May 3, 2024

  1. Michigan CRA Plans to Open State-Run Testing Laboratory

Crain’s Detroit Business reported this week that Michigan’s Cannabis Regulatory Agency plans to open a new testing lab by January of next year in order to promote and enforce safety standards. While funds have been allocated for the establishment and operation of a testing lab, CRA regulators reportedly are asking Michigan legislators to pass a bill that would give the agency more explicit authority to take this action.

Why it Matters: Having an independent, state-run lab would, according to regulators, help establish trust in products and root out potential corruption in the legal cannabis industry.


  1. Fraser Trebilcock Attorney Robert D. Burgee Recognized as a ‘Michigan Go To Lawyer’ for Business Transactions by Michigan Lawyers Weekly

Fraser Trebilcock attorney Robert D. Burgee has been recognized by Michigan Lawyers Weekly as a ‘Michigan Go To Lawyer’ in 2024 for business transactions. “I am honored to have been recognized by Michigan Lawyers Weekly as a ‘Michigan Go To Lawyer’ for business transactions,” said Bob.

Why it Matters: Mr. Burgee serves as Co-Chair of the firm’s Business & Tax Department and Chair of the firm’s Employee Benefits Department. He has over a decade of experience assisting business clients and entrepreneurs with startups, acquisitions, succession, and growth planning, as well as more general legal guidance, including navigating civil matters, regulatory compliance, employee benefits, and human relations. Read more.


  1. June Business Education Series

Most entrepreneurs and business leaders face similar frustrations – employee conflicts, lack of sales, profit woes and inadequate growth. Decisions never seem to get made, or, once made, they fail to be properly implemented. There is a solution, and it is not complicated or theoretical.

Why it Matters: The Entrepreneurial Operating System (EOS) is a practical method for achieving the business success you have always envisioned. More than 100,000 companies have discovered what EOS can do. Learn more and to register.


  1. Marijuana to be Rescheduled by DEA

It was announced this week that the DEA is planning to reclassify marijuana from a Schedule I drug to a Schedule III drug, following a recommendation from the Health and Human Services Department.

Why it Matters: While this move is still subject for review by the White House Office of Management and Budget, this clears a significant regulatory hurdle. Marijuana will still not be legal on the federal level for recreational use following this reclassification.


  1. FTC Issues Final Rule Banning Non-Compete Agreements Nationwide

On April 23, 2024, in a 3-2 vote, the Federal Trade Commission (FTC) issued a final rule banning non-compete clauses in most employment agreements nationwide. The rule is scheduled to go into effect 120 days after it is published in the Federal Register.

Why it Matters: Under the final rule, “Non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Read more from your Fraser Trebilcock attorneys.

Related Practice Groups and Professionals

Cannabis Law | Sean Gallagher
Business & Tax | Robert Burgee
Labor, Employment & Civil Rights | David Houston
Business & Tax | Andrew Martin