Fennemore’s Tax, Mergers and Acquisitions, and Real Estate Analysis of the Rescheduling of Medical Marijuana

On April 22, 2026, the U.S. Department of Justice (DOJ) and the U.S. Drug Enforcement Administration (DEA) issued an order (Order) placing both U.S. Food and Drug Administration (FDA)-approved products containing marijuana and marijuana and marijuana products subject to a state medical marijuana program in Schedule III of the Controlled Substances Act.  DOJ also initiated an expedited administrative hearing process to consider the broader rescheduling of recreational (or adult use) marijuana from Schedule I to Schedule III.  The hearing process will begin on June 29, 2026, and end on July 15, 2026, and will provide a timely and legally complaint path to evaluate broader changes to marijuana’s status under federal law. This landmark order represents one of the most significant shifts in U.S. drug policy in decades.  

This Order does not apply to recreational cannabis, nor is recreational cannabis legal under federal law even if a state permits its possession or use.

The regulatory landscape is actively evolving. State license holders, service providers to license holders, healthcare providers, investors, and other stakeholders across the cannabis industry are closely watching and waiting to see the opportunities and challenges that may unfold.

Fennemore attorneys across multiple practice areas continue to monitor these developments and assess their potential impact on clients navigating compliance requirements, operational challenges, federal and state regulations, taxation and new business opportunities.

This article is the second installment in a two-part series examining the potential implications of the Order. In Part One, available here, we provided an overview of the Order and explored its initial legal and business considerations. In this installment, we focus on tax law, mergers and acquisitions, and commercial real estate, highlighting key developments and practical considerations for businesses and stakeholders moving forward.

Tax Law, Robin Klomparens and Cameron Hess

For tax reporting, caution is urged due to the new developments and issues described below.

IRC § 280E Not Amended, but Change is Expected. The Internal Revenue Code (IRC) was not changed by the recent rescheduling order issued by Acting Attorney General Blanche on April 22, 2026.  Neither the President’s December 2025 Executive Order nor the Attorney General’s rescheduling of Food and Drug Administration (FDA)-approved medical marijuana products and state-licensed medical marijuana and medical marijuana products to Schedule III controlled substances changes IRC Section 280E’s provisions preventing marijuana taxpayers from deducting typical business deductions such as office rents and general payroll and other administrative expenses.  That section still states that typical business expenses incurred by businesses in the illegal marijuana industry are disallowed.  The rescheduling order only gives tax relief from the punitive disallowance of business deductions to businesses registered with the Drug Enforcement Agency (DEA) for medical marijuana FDA-licensed products, such as Epidiolex, and medical marijuana and medical marijuana products cultivated, manufactured, distributed, and dispensed by state licensees.

Retrospective Relief – Maybe. Also, the rescheduling change is not retroactive (at least not yet) and only applies prospectively; specifically, it applies to medical marijuana businesses for calendar year 2026 and future tax years. We say “at least not yet” because in the rescheduling order, Acting Attorney General Blanche encouraged the Internal Revenue Service (IRS) to consider retrospective relief to state-licensed medical marijuana businesses. This comment is suggestive but not binding. Thus, medical marijuana state-licensed marijuana businesses under IRC Section 280E do not qualify for business deductions during any tax period which includes a single day before April 22, 2026, or any time period during which medical marijuana was a Schedule I drug. Tax law specifically states that general and administrative expenses are disallowed deductions if there is a date “during the taxable year” in which any  Schedule I controlled substance (marijuana) is sold.

Medical and Adult Use Licensees are an Anomaly. Remarkably,  if any marijuana business conducts both medical and adult use pursuant to its state license(s), as most of the Arizona dispensary licensees do,  there is no current IRS guidance prescribing whether any portion of the business’ medical marijuana expenses may be segregated and deducted for this or subsequent tax years, nor is there any guidance on how or how much of such deductions would be appropriate. Please stay tuned as the DEA and IRS are expected to issue new regulations and guidance. We will issue updated alerts as this dynamic situation rolls out.

Federal vs. State Tax Laws.  One important issue to keep in mind is that state tax laws differ from federal tax laws. Some states like California allow for the deduction of typical business expenses of marijuana businesses, medical and recreational, because there is no state tax law counterpart to IRC Section 280E. This is not the rule in Arizona. Therefore, we recommend that a marijuana taxpayer and its tax advisors examine each applicable state’s tax laws to determine tax implications as applied to the taxpayer in contrast to tax implications imposed by federal law.

Mergers & Acquisitions, Janet Jackim

The Order is beginning to encourage a rejuvenation of the medical marijuana marketplace that, until late April,  had been playing second fiddle to the more recent, lucrative, and expansive recreational (adult use) market.  It’s an interesting twist of fate for recreational marijuana businesses in early adopter states like California, Colorado, Washington, Oregon, Alaska, and Maine to now refocus their attention from recreational users to medical marijuana patients and caregivers.

As described in the above summaries and our first installment in this series, 280E tax relief to state-licensed dispensers, manufacturers and distributors will have a substantial impact upon medical marijuana businesses’ earnings, cash flow, and overall credit rating that, in turn, will make them more bankable. As a result, we will see some marijuana businesses survive the long drought of current and past negative market forces (higher employment, rental, equipment, and taxation costs, more competition, and lower marijuana margins). But how much can the newly-legalized medical marijuana market, which has seen decreasing patient counts over the last 10 years, deliver to the marijuana businesses’ bottom line through application of the Order’s 280E tax relief? And will new patients and caregivers pay medical card fees to, in turn, get their own relief from state and local luxury or excise taxes not imposed upon their purchases? 

Marijuana businesses in states like Florida, Arkansas, Kentucky, and Pennsylvania will certainly see more capital and increased merger and acquisition consolidations because these states (and 10 others) have medical-only programs. Application of 280E tax relief will result in dramatic financial improvement, notwithstanding the additional operational obligations imposed by the Order.  We will see the continued advancement of multi-state operators (MSOs) in those states through consolidation of smaller singular and regional players because the MSOs such as Trulieve (180 U.S. stores), Curaleaf (151 U.S. stores), and Green Thumb Industries (110 U.S. stores) have investor and lender resources the smaller operators do not. Acquisitive growth is good to report. For these states, there are fewer regulatory hoops to jump through and smaller regulatory costs and expenses to fund than those in dual license (medical and recreational) states.

Dual license states like Arizona, California, Colorado, and the Pacific Northwest may see some consolidation activity, but the Order’s impact upon those licensees will be less noticeable unless patient and caregiver purchases are substantially better than historic counts. Marketing and business development to that consumer base is expensive and may not show a return, although we are seeing some growth in the number of older patients using medical marijuana on a regular basis. And we will see some medical providers such as nursing homes, rehabilitation clinics, and post-surgery therapy centers expand into medical marijuana remedies under controlled circumstances.

In these dual license states some financial improvement as a result of 280E tax relief on their medical marijuana revenues may sweeten an M&A transaction, but that relief won’t likely yield enough revenue to really energize consolidation activity. Mergers and acquisitions in dual license states will continue to focus on the smaller, maybe failing, competition. Additionally, the benefits obtained from DEA registration of the medical side of the dual license business may bring hazardous side effects (alerting DEA to the recreational use side of the business that remains illegal under federal law, informing DEA of sensitive, private information of employees, and accounting nightmares from having to segregate the medical from the adult use divisions of the business). And these licensees do not have DOJ or IRS tax guidance on how they should account for only part of their business — their medical-only business – or whether all operations, reportings, filings, employees, and facilities must be segregated between medical and adult use.  

 Sellers that closed their transactions before April 22 obtained a premium on the sales price because the potential for medical marijuana rescheduling had been announced by the President in December 2025.  Will sellers demand a price premium on the expectation that this summer’s rescheduling hearings will result in rescheduling adult use marijuana? Better to include the premium if you are in the midst of M&A negotiations!

Commercial Real Estate, Janet Jackim

The April 22 Order focused national attention upon the formalities of rescheduling medical marijuana. Almost nothing in the Order specifically mentions real estate, but agricultural and commercial real estate (CRE) are the most important component of the marijuana business other than the license and marijuana inventory. Without CRE, there would be no marijuana to cultivate, manufacture, transport, sell, or tax. The Order may represent hidden benefits to the landlords, investors, and lenders of medical marijuana businesses, whether medical only or medical and adult use dually licensed.

As to landlords, investors, and lenders, a marijuana business may realize increased sales, although mere rescheduling is not likely to encourage new patients or caregivers simply because the federal animus of taxation has been removed. But more publicity and advertising focused on medical marijuana treatments, new educational programs offered by dispensaries and cultivators, and more medical provider involvement (nursing homes, therapeutic facilities, and hospitals, for example) in medical marijuana distribution could produce new patients and caregivers. Landlords whose leases include percentage rent provisions could see breakpoints broken through. Loan covenants could be positively impacted by the increased revenues of medical marijuana dispensaries, cultivators, transporters and manufacturers, and marijuana dispensaries may want to refinance or take on additional financing because they have the cash to pay on the loan. And investors’ return on investment could similarly improve.

Of course, the above statements reflect the Order’s positive outcomes from 280E tax relief and increased sales. However, dual medical and adult use licensees will experience new costs and expenses associated with DEA regulations requiring separate accounting of medical versus adult use financials, separate tax filings, new entity formation or entity restructuring for separate taxation schemes, separate physical facilities, two teams of employees, and distinctive brands and other as yet unknown separation requirements. How this segregation of medical from adult use marijuana will sort out is not yet predictable.

Now that the Order has been issued, lenders, landlords, and investors should consider conducting additional due diligence on their borrowers, tenants, and investments as follows, assuming they have the contractual right to do so or state law would not prohibit such inquiries:

• Has the medical marijuana business made application to register with the DEA and if not, why not? When is registration expected? Request a copy of the application.
• Has the medical marijuana business filed amended tax returns or otherwise protected its right to claim tax refunds, and if not, why not? Request a copy of the relevant filings.
• What steps is the business taking to separate its accounting, operations, and marijuana and marijuana products from the adult use business, and if not, why not?
• Will the separation requirements mandate restated financials, capex to fund tenant improvements or an amendment to the loan or lease for additional CRE, or new/different cost structures? Does the business have sufficient funds to carry out these requirements?
• What new commitments will be installed to increase medical marijuana sales?
• How will the loan documents, lease, and/or shareholders agreement be affected by the Order? Will management services agreements between various service providers and the registered medical marijuana business be necessary or desired?
• How will the business’ zoning be impacted? Will additional parking or storage be required?
• Has the state or local governmental authority issued guidance to medical marijuana businesses concerning the Order’s impact?
• Does the medical marijuana business believe that DEA registration is required in order for the business to obtain 280E tax relief? Has the business engaged competent cannabis legal counsel on the Order’s impacts?
• Does the business expect to change its current business plan as a result of the Order? If so, how?

CRE investors, lenders, and landlords have a lot at stake as a result of the Order’s impact upon their investment in, loan to, or lease of the medical marijuana business and its assets. While there are numerous uncertainties in the implementation of the Order, it is already clear that that group should be asking questions of the business and digging into its plans for reaping the opportunities afforded by the Order.

This is a developing situation, and we’ll continue monitoring it closely. As soon as there are meaningful updates, we’ll bring them to your attention.

Questions? Fennemore’s Cannabis Business Law team, chaired by Janet Jackim, collaborate to provide proactive and integrated strategies across all aspects of business operations, including regulatory matters, corporate formation, mergers and acquisitions, debt and equity financing, fund formation, real estate, intellectual property, and tax for marijuana and hemp businesses nationwide, regardless of the size of the operation.

This content is for general educational purposes only and does not constitute legal advice. If legal advice is needed, please consult with an attorney.

Robin Klomparens is a tax attorney based in Fennemore’s Sacramento office. Renowned for her expertise in tax law, Robin excels in navigating complex tax code changes, providing her clients with up-to-date and effective legal counsel. She can be reached at rklomparens@fennemorelaw.com.

Cameron L. Hess, CPA, Esq., is a Director in Fennemore’s Tax Law practice group.  . A Certified Public Accountant with KPMG, Cameron’s diverse 41-years of experience focuses on strategic planning and advocacy for clients in real estate, business transactions, estate planning and nonprofits.  He is distinctly recognized for his federal, state, and local tax controversy work.  He can be reached at chess@fennemorelaw.com.

Janet Jackim, Chair of the Cannabis Business Industry Group, is a well-seasoned cannabis and business attorney whose practice focuses on cannabis transactions, litigation, commercial real estate, mergers and acquisitions, and litigation involving the foregoing. She can be reached at jjackim@fennemorelaw.com.