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
The latest Dirty Dozen tax scam list is familiar because too many are still falling for the schemes

March 5, 2026

Tax filing season is also peak time for tax scams. Be on the lookout for…

Read More
Hello Tax Season 2026

Happy New Tax Year! Are you ready to file your 2025 tax return? I know, too early to ask. But Tax Day 2026 will be here before we realize it. The Internal Revenue Service deadline to file and pay any tax we owe is the regular April 15 date this year. It’s also Tax Day for most of the states that collect income taxes from their residents, which is most of the states! If that seems too far away right now, don’t worry. As is the case every tax season, the ol’ blog’s tips and other tax reminders should help all of us meet our state and federal responsibilities. Procrastinators also will want to keep an eye on the countdown clock just below. It tracks how much time we have until April’s Tax Day, just in case we put off our annual tax task until the absolutely final hours and decide we need to instead get an extension request into the IRS by that date. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

Comments
Leave the first comment