Expected marijuana rescheduling should reduce cannabis businesses’ federal taxes

August 11, 2024

Marijuana businessnman

The Department of Justice, per a Drug Enforcement Administration request, is moving to transfer of marijuana from Schedule I of the Controlled Substances Act (CSA) to Schedule III.

That decision aligns with the stance of the U.S. Health and Human Services Department, and is supported by the Biden Administration.

The change would not make cannabis legal nationally. It still will be a controlled substance under federal law.

But the recategorization would provide state-legal cannabis businesses some banking access, and the ability to claim some tax breaks they currently are denied.

Less of a stigma: Going from Schedule I to Schedule III on the CSA list also could help in the public perception of the various retail dispensaries in the 24 states and Washington, D.C., where recreational marijuana is legal. Another 14 states have approved cannabis for medical use.

Marijuana has been a Schedule I drug since the CSA’s enactment in 1970. Schedule I drugs are those which are determined to have no currently accepted medical use. Heroin, LSD, ecstasy, peyote, and, for now, weed, are on the list.

Schedule III substances, however, are defined as "drugs with a moderate to low potential for physical and psychological dependence." Marijuana would join anabolic steroids, ketamine, testosterone, and Tylenol if it makes it into the III category.

Easier business banking: From a practical business standpoint, reclassifying cannabis as a Schedule III substance could make the financial matters of state-legal cannabis businesses much easier.

Under current law, cannabis’ Schedule I status prevents dispensary owners from using deposit accounts, insurance, and other financial services the way they are available to other businesses.

Many banks won't accept cannabis companies as customers because of their products CSA categorization. Financial institutions fear that doing so could expose them to federal legal trouble. Similarly, major credit-card companies also won't process marijuana-related transactions for the same reason.

That means the dispensaries must operate as cash businesses. Those seeking banking access for cannabis businesses point out that cash-only operations tend to be targets for theft, organized crime, and tax evasion.

Marijuana-cannabis-money_GreenerCulture

As recreational cannabis use has become more accepted across the country, federal lawmakers have become more supportive. Members of Congress in both chambers and on both sides of the aisle have, over the years, introduced and/or sponsored legislation that would expand access to banking services for cannabis businesses operating legally under their states’ marijuana laws.

However, those measures to allow banks to handle marijuana funds without the risk of federal prosecution have repeatedly stalled. Much of the opposition has been based on the substance’s federal category I classification. The change to Schedule III could help build momentum for cannabis banking bills.

Tax implications, too: There also are, of course, taxes matters. Rescheduling marijuana from I to III would eliminate the Internal Revenue Code (IRC) 280E restrictions.

That section of the tax code makes marijuana businesses ineligible for certain federal tax deductions. Specifically, the law says even state-legal cannabis operations are not permitted to claim these deductions because they are, under the CSA, engaged in “trafficking in controlled substances…which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

A Congressional Research Service (CRS) report from March 2021 notes that the legislative history of Section 280E indicates that Congress enacted the IRC provision to codify a sharply defined public policy against drug dealing.

The practical application of Section 280E is that most state-legal cannabis businesses must add back such significant expenses as rent and wages for sales staff when calculating their federal income tax. The only expenditures that have been deductible for cannabis companies have been those related to cost of goods sold.

Some states have changed their laws, opting not to follow the federal Section 280E and letting cannabis businesses within their borders claim full tax deductions on the state level. Still, the federal tax burden from that IRC section is predominant, and why marijuana businesses have paid $2.3 billion more in federal taxes compared to businesses in other sectors. It also helps explain why approximately 75 percent of cannabis businesses currently operate without a profit.

Since Section 280E applies only to activities involving substances in Schedule I or II, moving marijuana from I to III would allow marijuana businesses to claim tax breaks other companies regularly use.

That’s also why Section 280E also is this weekend’s By the Numbers figure.

Rescheduling timing: So when will Uncle Sam formally deem marijuana less dangerous, leading to some positive financial and tax changes for those in the legal cannabis business?

The comment period for the official notice of proposed rulemaking (NPRM) to reschedule marijuana ended on July 22. Those remarks will be considered and some incorporated into the formal rulemaking.

It's not a speedy process. Rescheduling a drug has in the past taken years to finalize. But given the federal agencies' and White House's agreement on the cannabis change, supporters are hopeful. Some are even predicting the final rule could become effective before the November election.

You also might find these items of interest:

 

Advertisements

🌟 Search Amazon Electronics 🌟
The text link above is an affiliate ad. If you click through and then buy a product, I receive a commission.

 

Share:

The More Tax Posts tab at the top of this page will take you to, well, more tax posts. You also can search below for a tax topic. 

Latest Posts
6 tax moves to consider this June

June 3, 2026

Definitely take a break this June. But taxes don’t take vacations. So, you also should…

Read More
Tax Season 2026 Continues!

We made it. Tax Day 2025 is finally over. For most of us. When the filing season started on Jan. 26, millions who were expecting refunds filed immediately. Most of us got our returns to the Internal Revenue Service by April 15. But plenty of taxpayers also got extensions. They are looking at an Oct. 15 filing deadline.

Those procrastinating filers aren’t a problem. In fact, the IRS appreciates taxpayers who take time to fill out their 1040 forms correctly. It also is grateful that tax submissions are spread out a bit, especially now that the IRS is a leaner agency. Processing returns is easier when they arrive throughout the year instead of in massive bunches.

But enough about Uncle Sam’s tax collection issues. The focus now is on all y’all who filed for extensions, giving you another six months to complete your return. Since your new mid-October due date will be here before you know it, let’s get started now on meeting it.

The ol’ blog is here to help you finish up your extended Form 1040. You can start with January’s tax tips page, which has links to the rest of the year’s tips by-month collections. You also can peruse various tax categories for more tailored advice by clicking on the More Tax Posts drop-down menu at the top of this (and every) page.

And to make sure you don’t miss your new filing deadline, the count-down clock below will let you know just how much time you to file by Oct. 15. At the latest.e. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

Comments