The cannabis industry knows well the economic burden imposed by Section 280E of the Internal Revenue Code of 1986 (Code). It substantially increases the cost of doing business because it disallows deductions for expenses related to "trafficking" in cannabis – expenses that other traditional businesses get to deduct, such as wages, rent, utilities, insurance, and more.
On May 16, 2024, the Drug Enforcement Agency (DEA), which is part of the Department of Justice, issued a Notice of Proposed Rulemaking (NPR) that proposes to transfer cannabis from Schedule I of the Controlled Substances Act (CSA) to Schedule III of the CSA.
Rescheduling cannabis from Schedule I to Schedule III would make Section 280E inapplicable to a cannabis business. It would continue to apply, however, to cannabis' cellmates under Section 280E, such as heroin, LSD, and Ecstasy.
While the road ahead for rescheduling may be long and winding, the operating assumption is that it will happen. The big question is "when," followed by "what can I do now to be prepared when it happens?" The NPR makes no mention of when rescheduling would become effective or how it will affect the tax treatment of cannabis business expenses. Nevertheless, there are a number of steps cannabis businesses can take now to prepare for the future.
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