The cannabis industry is on the verge of a significant shift as the Drug Enforcement Administration (DEA) is expected to finalize the rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substance Act later this year or in 2025. This change will have far-reaching tax implications for cannabis businesses, primarily due to the potential inapplicability of IRC section 280E.
Under current law, section 280E prohibits businesses that traffic in Schedule I or II substances from deducting their expenses, resulting in effective tax rates as high as 70% for some cannabis operators. The move to Schedule III would exempt cannabis businesses from 280E, potentially saving the industry billions in taxes.
The critical question for tax professionals is the effective date of the final rule and its impact on the availability of deductions for cannabis businesses. It remains unclear whether the inapplicability of 280E will be effective from the date the final rule is published or if it will be retroactive for the entire year in which the rule is published. This decision will have a significant impact on cannabis businesses' tax liabilities and planning strategies.
Tax advisers are calling for IRS guidance on various issues arising from the rescheduling, including: