What Schedule III Means for Cannabis Businesses

In a significant shift in federal drug policy, the U.S. government has recently moved to reclassify marijuana from a Schedule I substance to Schedule III under the Controlled Substances Act. While this change does not legalize marijuana at the federal level, it has meaningful implications for how cannabis businesses operate, how they are valued, and how deals are structured.

For buyers, sellers, and operators in the cannabis space, this development is worth paying close attention to.

A Quick Primer: What Does Schedule III Mean?

Schedule I substances are deemed to have 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, with regulation still in place.

The reclassification acknowledges what many states and market participants have long operated under: marijuana has legitimate medical applications. However, it remains a controlled substance, and most federal prohibitions still apply.

The Biggest Business Impact: Relief from IRS Code Section 280E

For cannabis businesses, the most immediate and consequential change is the expected removal of Internal Revenue Code Section 280E restrictions.

Under 280E, businesses trafficking in Schedule I or II substances cannot deduct ordinary and necessary business expenses, dramatically inflating effective tax rates. If marijuana is treated as a Schedule III substance for tax purposes, cannabis operators may be able to deduct expenses such as:

• Payroll

• Rent

• Marketing and advertising

• Professional fees

  
  

This could materially improve cash flow, margins, and overall financial performance across the industry. From an M&A perspective, this change has the potential to reshape historical financials, normalized EBITDA calculations, and forward-looking projections.

How This Affects Buying and Selling Cannabis Businesses

Valuations may increase. Improved after-tax profitability can lead to higher valuations, particularly for well-run businesses with clean books and scalable operations.

Deal structures may evolve. Buyers may be more willing to pursue equity acquisitions rather than strictly asset deals if federal tax exposure is reduced and compliance risks become more manageable.

Financial diligence will get more nuanced. Historical financials were shaped by 280E constraints. Buyers will need to carefully evaluate what earnings would look like in a post-280E environment and assess how quickly tax treatment actually changes in practice.

Timing matters. Sellers may consider whether to go to market now or wait for clearer guidance and implementation, while buyers may push for pricing that reflects remaining regulatory uncertainty.

What Hasn’t Changed (Yet)

Despite the headlines, several critical issues remain unresolved:

• Marijuana is still illegal under federal law.

• Banking restrictions, while improving, are not fully resolved.

• State-by-state regulatory regimes still control licensing, ownership, and operations.

• Interstate commerce remains prohibited.

  
  

In short, this is progress, but not a cure-all.

Operational Considerations for Cannabis Business Owners

Business owners should view this moment as an opportunity to prepare, not relax. Now is the time to:

• Tighten financial reporting and accounting practices

• Revisit entity structures and tax planning strategies

• Document compliance procedures and licensing status

• Identify operational inefficiencies that were masked by 280E tax pressure

  
  

Strong fundamentals will matter even more as institutional capital and strategic buyers become more comfortable entering the space.

The Bottom Line

Marijuana’s reclassification to Schedule III is a meaningful step toward normalization of the cannabis industry, particularly from a tax and deal-making perspective. While it does not eliminate regulatory risk, it does create new opportunities for operators who are prepared and well-advised.

For those buying, selling, or scaling a cannabis business, the landscape is shifting. Understanding how these changes affect valuation, deal structure, and long-term strategy will be essential in the months ahead.