Executive Order Reclassifies Cannabis to Schedule III, Easing Regulatory Burden on $32 Billion Industry

Federal Cannabis Reclassification Shifts Regulatory Landscape

The U.S. cannabis industry received a major boost following an executive order signed by President Trump on Thursday, December 18, 2025, formally reclassifying cannabis from a Schedule I to a Schedule III controlled substance. This move is expected to have substantial implications for the legal marijuana industry and the broader $32 billion cannabis market.

The reclassification marks a significant shift in federal drug policy, acknowledging the growing trend of state-level legalization for both medical and recreational use. Previously, as a Schedule I drug, cannabis was federally classified alongside substances like heroin, deemed to have no accepted medical use and a high potential for abuse. The shift to Schedule III places it alongside drugs like Tylenol with codeine, recognizing its medical utility and lower abuse potential.

Financial and Operational Implications for Cannabis Companies

The primary benefit of the reclassification is the anticipated reduction in financial and regulatory pressures on cannabis companies. The most material impact is expected to be on taxation. Under Schedule I, cannabis businesses were subject to Internal Revenue Code Section 280E (280E), which prohibits businesses dealing in Schedule I or II substances from deducting ordinary business expenses, leading to effective tax rates often exceeding 70%.

The reclassification from a Schedule I to a Schedule III drug is anticipated to lower financial and regulatory pressures on cannabis companies, potentially reducing their tax burden and opening up banking options.

Moving cannabis to Schedule III is expected to exempt these businesses from 280E, allowing them to deduct standard operating costs, such as payroll, rent, and utilities. This change could dramatically improve profitability and capital availability across the sector.

Market Impact and Operational Alignment

While much of the immediate focus has been on policy and capital, the operational requirements for a federally recognized cannabis industry are also critical. The shift necessitates that companies adopt federal-grade systems to ensure compliance and operational integrity.

• Banking Access: The change is expected to encourage traditional financial institutions to offer services to cannabis businesses, easing the current reliance on cash transactions and specialized, high-cost banking solutions.
• Research: Reclassification is likely to streamline the process for conducting scientific research on cannabis, which was previously heavily restricted under Schedule I.
• Operational Standards: Companies must now align their operations with federal standards, requiring robust, auditable systems. As noted by industry observers, "The conversation around cannabis reclassification... has focused heavily on policy and capital. Far less attention has been paid to operations."

The executive order, signed on Thursday, December 18, 2025, signals a new era for the U.S. cannabis industry. While the details of implementation and regulatory oversight will unfold in the coming months, the foundational change is expected to unlock significant growth potential for the sector, which has long been constrained by conflicting federal and state laws.