Historic Shift in Federal Policy
After over fifty years of federal prohibition, the Drug Enforcement Administration’s (DEA) proposal to reclassify marijuana from Schedule I to Schedule III substance under the Controlled Substances Act marks a historic shift in national drug policy.
This decision to reclassify cannabis, spurred by changes in public perception and strong federal support, could redefine the legal landscape for marijuana across the United States.
Unlike Schedule I drugs, which are deemed to have no medical use and high abuse potential, Schedule III substances are recognized for their medical benefits and lower potential for abuse.
Impact on Research and Business
This reclassification of cannabis could significantly expand scientific research and legal cannabis businesses. By moving cannabis to Schedule III, the federal government acknowledges its medical uses and reduces the barriers to research, which has been heavily restricted. This change would enable more extensive and federally-supported scientific studies on marijuana’s therapeutic benefits and risks, as well as open the medical cannabis to pharmaceutical companies in states where it is legal.
The Financial Implications and Changes Due to 280E
For the cannabis industry, one of the most immediate and significant effects would be the alteration of the IRS code 280E. Currently, this tax code prevents state-legal cannabis businesses from deducting typical business expenses due to the Schedule I status.
Reclassifying cannabis to Schedule III will remove these restrictions, enabling cannabis businesses to start claiming federal tax deductions, likely saving cannabis businesses significant amounts of money, encouraging further development in the sector, and potentially reduced prices for consumers.
Timeline for Reclassification Process
Although this is a promising development, the proposal to reclassify marijuana is in its preliminary stages, and the timeline is unclear. The formal process requires a public comment period followed by reviews and potentially a hearing. The final rule will be published only after these steps.
Estimates suggest that cannabis reclassification change might effective in late 2024 or early 2025. Politics may play a role in the timing also, especially since it is an election year.
For cannabis businesses, this means there’s a need to stay vigilant about the developments, as the exact date will significantly affect their financial planning, particularly concerning tax payments.
Milestone for the Cannabis Industry
This reclassification is a significant step for the cannabis industry. While this decision does not resolve all conflicts between state and federal laws or fully remove cannabis from the list of controlled substances, it is a significant move improving the financial landscape for cannabis businesses and consumers.
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Sarah Bantz
Sarah Bantz, CPA, is a senior accountant in Smith Patrick’s growing cannabis accounting and business advisory division. Her experience includes: tax planning for cannabis-based businesses, 280(e) calculations, cannabis business payroll, cash flow management, internal controls and cash handling, and product inventory. The Smith Patrick CPA team helps marijuana industry clients make informed, strategic data-driven decisions, while also keeping their back office humming with updated and accurate financial data.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.
