The U.S. Government Argues for Cannabis Rescheduling

Signifying a major departure from its historic stance, the United States federal government is currently arguing for the rescheduling of recreational cannabis from a Schedule 1 drug to a Schedule III drug. The Drug Enforcement Agency is conducting public hearings on the proposal, scheduled to run through July 15, 2026. The agency is acting under an executive order to reschedule the drug and is hearing prohibition-style arguments against the move while representing the positive case during the sessions.

This marks a sea change in the long attempt to end federal cannabis prohibition, and while the proposed schedule change would not completely make recreational cannabis legal it would have far-reaching business and economic impacts on the legal cannabis industry. The federal government rescheduled medical cannabis in April, 2026, in a fast-tracked move that recognizes the legitimacy of medical cannabis in the 40 states with legal medical programs. Now the government is deciding whether it’s the right move to do the same with recreational cannabis products currently legal in 24 states.

Potential Effects on the Industry

The biggest effect, by far, of the switch to Schedule III has to do with taxes and accounting, and the bottom line. Under Schedule I cannabis operators are subject to the provisions of Section 280E of the Internal Revenue Code. These businesses cannot deduct normal expenses like rent, utilities, marketing, and employee wages. They can only deduct costs of goods sold, so the effect is that cannabis companies are paying taxes on gross income rather than on the net income used by almost every other business. In other words, cannabis businesses often owe federal taxes even though they lost money.

And the burden can be significant. Typical corporate federal tax rates are about 21% of net profits, while cannabis tax rates can range from 40% - 80% of net profits under the 280E provisions. A lifting of the 280E restrictions would have an incredible impact on profitability across the industry. As a precursor, it will be interesting to see how the April medical cannabis decision will impact next year’s profits in that sector.

Additional benefits of rescheduling include improved access to banking services, enhanced investment appeal from institutions that have avoided Schedule I substances, and the potential for interstate commerce as federal restrictions ease. While rescheduling wouldn’t fully legalize cannabis, it would reduce regulatory risk and create a pathway for broader reform.

A Company to Watch

LEEF Brands (CSE: LEEF) OTCQB: LEEEF) is a company to watch here given its recent expansion into the New York market from its home range in California and its increasingly profitable profile. The company specializes in extraction, taking raw cannabis and transforming it into high-value concentrates, oils, and ingredients that power everyone from boutique craft brands to major multi-state operators. Instead of having its revenue depend on building a single iconic consumer brand, LEEF enables dozens of brands through white-label manufacturing, toll extraction, and partner supply contracts.​

LEEF planted 65 acres last year, just planted 80 acres this year, and plans to plant 180 acres next year on its wholly owned Salisbury Canyon Ranch property near Santa Barbara, California. Rather than contracting with a huge network of licensed growers in California, the company is pivoting toward supplying its own plants for extraction. Among the benefits are guaranteed pesticide free feedstock, planting crops specifically for optimized extraction outputs, and a very large decrease in operating costs.

Watch a video with LEEF Brands' CEO, CFO, and IRO discussing Q1 2026 results and the path forward.

LEEF’s most recent financial results from Q1 2026 reflect a major positive impact on the company’s finances from just the first round of in-house cultivation. Highlights relevant to this discussion include:

• Gross Margin: 49%, compared to 22% in Q1 2025. Margins more than doubled due to lower input costs from increased use of in-house biomass from Salisbury Canyon Ranch and increased output from our higher-margin hydrocarbon line.
• Gross Profit: $4.6 million, compared to $2.1 million in Q1 2025, driven by significant margin expansion as the company scaled its vertically integrated operating model.
• Adjusted EBITDA: $2.4 million, compared to $(0.7) million in Q1 2025, driven by higher gross margins and a 16% year-over-year decline in operating expenses.
• Operating Cash Flow: $0.4 million, compared to $(1.8) million in Q1 2025. Operating cash flow included approximately $1.2 million of California Department of Cannabis Control (DCC) licensing fees and other seasonal startup costs paid in cash during the quarter; excluding this timing impact, the company would have generated approximately $1.6 million in operating cash flow and positive free cash flow.

These are really good signs for a company in the cannabis industry where profitability, or even the potential of it, is scarce. This is now 4 straight quarters with LEEF reporting positive adjusted EBITDA and operating cash flow. Now imagine the impact the removal of 280E tax liabilities would have on a growing and expanding company like this one.

The whole sector would benefit from the rescheduling of cannabis, and investors are encouraged to monitor developments on the federal level. Regardless, LEEF is an example of a cannabis company that is doing things right even with the onerous tax laws enforced under the current regulations. Keep an eye on this situation, it merits your attention.

Author's Disclosure: This article reflects the author's independent analysis and is provided for informational purposes only and should not be considered financial or investment advice. Readers are encouraged to conduct their own independent research and due diligence before making any investment decisions.