Rescheduling Cannabis Creates a Tax Reframe

May 6, 2024

Types : Alerts

After an expected Drug Enforcement Agency reclassification, under federal law, cannabis will move from Schedule I to Schedule III. Currently, cannabis is listed under Schedule I, a category of drugs like heroin and LSD “with no currently accepted medical use and a high potential for abuse.” Under the anticipated change, cannabis will be listed under Schedule III, a category of prescription-required drugs like ketamine and anabolic steroids “with a moderate to low potential for physical and psychological dependence.”

Critics point out that this proposed change still lists cannabis in a category above Schedule IV drugs, which include Xanax, Valium, and Ambien, and some suggest that cannabis should be removed from the controlled substances list and regulated like alcohol. Still, the DEA proposal acknowledges the medical use of cannabis for the first time. And while 24 states, including New Jersey, have legalized cannabis for recreational use, this proposed change does not legalize cannabis for recreational use.

Even without a nod from the DEA for recreational use, this expected reclassification gives cannabis businesses much to look forward to financially. Because cannabis is currently a Schedule I drug, Internal Revenue Code § 280E prevents cannabis businesses from taking any tax deductions or credits, which would reduce their tax liability. This mostly prevents cannabis businesses from taking deductions for their ordinary and necessary business expenses. Reclassifying cannabis as a Schedule III drug would remove these businesses from the purview of 280E and allow them to take deductions for their ordinary and necessary business expenses in the same way that most other businesses do. This change would be particularly helpful in lowering the tax liability of cannabis retail businesses that do not benefit from the cost-of-goods-sold reductions granted to many cannabis growers and manufacturers by Internal Revenue Code §§ 471 and 263A.

The DEA’s proposal is still subject to review by the White House Office of Management and Budget.

If you have any questions please contact Alexandra S. Jacobs or Micah Mahdi of Montgomery McCracken’s Cannabis Law Practice Group.



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