The United States Department of Justice recently proposed a rule that would move marijuana from a Schedule I to a Schedule III drug classification, a significant shift in federal policy that might have an impact on cannabis businesses in states where it is legal for recreational use.
The update would not legalize marijuana globally, but it would loosen regulations and eliminate a significant tax penalty known as 280E, according to cannabis experts, just as Minnesota prepares to begin its legal market next year.
That tax provision now bars cannabis companies from deducting ordinarily conventional company expenses such as property rent, utilities, and employee pay.
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“It will save most cannabis businesses anywhere from 40% to 70% in taxes, depending on whether they’re retail, wholesale, or cultivation,” said Nikki Rohloff, managing partner at Rohloff Associates and Canopy Accounting, which specializes in cannabis industry consulting. “So it represents a significant tax benefit for them. It’s a big opportunity for them to reinvest in their businesses, grow them, and eventually put money back into the communities.”
Marijuana is classified as a Schedule I drug, just like heroin and illicit fentanyl, whereas Schedule III substances have a “moderate to low potential for physician and psychological dependence,” according to the Drug Enforcement Administration. Ketamine and anabolic steroids are two medicines that fall under this group.
According to Jason Tarasek, a cannabis attorney with Vicente LLP, lowering the tax burden will increase the profitability of cannabis enterprises. While challenges remain, such as access to financing and banking, he feels the Justice Department’s approach is a significant step that signifies further progress toward relaxing federal marijuana regulations.
“I think over the course of the next few years, you’re going to see a slow erosion I think both with federal policy and increasingly with state policy acknowledging that perhaps marijuana should be treated just like alcohol and regulated just like alcohol,” Tarasek stated.
Almost half of the country has authorized it for recreational use, and more have medical programs in place. A recent survey indicated that daily marijuana users outnumber daily alcohol drinkers for the first time. However, the process of reclassifying marijuana is still in its early stages and may take some time. Marijuana will remain a Schedule I substance until the process is complete.
That is why Rohloff advised her clients to continue to evaluate the implications of Section 280E of the tax code when developing their business plans.
State inspectors will give pre-approved business licenses to some applicants later this year as they plan to launch retail locations next year.
“We’re still having them factor in what the federal taxes are going to be on that just so that we can plan better, that they have the cash flow needed to set them up to be a successful business,” she explained. “And if this does get passed by the time Minnesota moves forward with recreational use, that is more of a bonus or a win to them, and not a detriment that we hadn’t factored in.”