Blog By: Antonio C. Ellzey
In the past decade, the U.S. has witnessed a remarkable surge in cannabis legalization, reflecting a notable shift in societal attitudes towards the plant.[i] Consequently, an increasing number of individuals recognize the present opportunity to jump into the industry by launching their own businesses. Some states have even implemented programs to help communities disproportionately impacted by the failed war on drugs.[ii] Nevertheless, running a marijuana-focused company is not without its problems––the most pervasive of which is Section 280E of the Internal Revenue Code.[iii]
Section 162 of the Internal Revenue Code permits businesses to deduct all necessary expenses incurred in conducting their trade or business during the taxable year, such as salaries and travel costs.[iv] However, there's a catch: Section 280E. This section restricts deductions for businesses engaged in the trafficking of controlled substances listed in Schedule I or II of the Controlled Substances Act (CSA), which is prohibited under federal law.[v] Accordingly, even though cannabis is legal in certain states, its classification as a Schedule I substance under the CSA means it remains federally illegal, and thus, subject to Section 280E.[vi] The CSA is enforced by the Drug Enforcement Agency (“DEA”).[vii]
This “reverse carve-out” creates a myriad of problems (and headaches) for those operating a legal cannabis-related business (“dispensaries”). For example, although dispensaries are permitted to deduct their cost of goods sold,[viii] banks, fearful of losing their FDIC status, are reluctant to engage in banking transactions with them.[ix] This has required dispensary owners to run all-cash businesses, keeping hordes of cash-on-hand at their place of business.[x] Because dispensaries cannot deposit their money into a bank account, they are frequent targets of theft and other violent crimes.[xi] Additionally, since dispensaries cannot take advantage of Section 162 deductions due to Section 280E, business owners are not always rolling in the green financially.[xii] But hope may be on the horizon.
Recently, the Department of Health and Human Services, called upon by President Biden, recommended that the DEA reclassify cannabis from Schedule I to Schedule III.[xiii] Under this change, cannabis would no longer be considered a controlled substance with no medical benefit and high potential for abuse.[xiv] Instead, it would align cannabis with substances like acetaminophen and ketamine which have a low propensity for abuse and recognized medical uses.[xv] While rescheduling would not change the legality of cannabis under federal law, it would bring much-needed relief to entrepreneurs and others looking to plant their seeds in the burgeoning cannabis industry.
Rescheduling cannabis to Schedule III is necessary to modernize federal policies and release the financial chokehold on businesses operating in the cannabis industry. Currently, Section 280E only affects controlled substances under Schedule I or Schedule II.[xvi] Therefore, rescheduling cannabis from Schedule I to Schedule III would make Section 280E no longer applicable, enabling dispensary owners, cultivators, and the like to deduct “necessary and ordinary business expenses” under Section 162.[xvii] This would ultimately boost profits earned for businesses and enhance the safety of their operations.
Opponents of rescheduling cannabis, however, say that the U.S. is obligated to abide by its treaty obligations which require cannabis to be a Schedule I or Schedule II controlled substance.[xviii] These treaty obligations trace back to the ratification of the Single Convention on Narcotic Drugs in 1967 (“Single Convention”) and was the result of an international effort to combat illicit drugs in the international market, including cannabis.[xix] Additionally, membership provides that the U.S. would “make arrangements at the national level for co-ordination of preventive and repressive action against the illicit traffic” and “assist [other nations] in the campaign against the illicit traffic in narcotic drugs.”[xx] The Single Convention was the reason why cannabis was and continues to be scheduled as a Schedule I controlled substance under the CSA.[xxi] Therefore, opponents argue that rescheduling cannabis from Schedule I to Schedule III would be a violation of the U.S.’s treaty obligations.[xxii]
Despite their confident stance, opponents overlook significant examples that challenge their argument. For instance, Canada, a fellow signatory of the Single Convention, federally legalized cannabis in 2018 without facing any violations of treaty obligations.[xxiii] Additionally, the United Nations reclassified cannabis in 2020 to acknowledge its medical benefits.[xxiv] Moreover, Germany, another signatory of the Single Convention, celebrated the legalization of cannabis on April 1, 2024.[xxv] Germany is now the third European nation to legalize cannabis, following in the footsteps of two other signatories to the Single Convention.[xxvi]
Furthermore, the rescheduling of cannabis from Schedule I to Schedule III would offer advantages to small business owners operating in states where cannabis is legal. With the ability to deduct taxes, employee wages and benefits, security services, and marketing and advertising costs, cannabis entrepreneurs would be able to realize higher profits, making the industry that much more profitable.[xxvii] Not to mention that rescheduling cannabis would also allow dispensaries to deposit their money in a bank account rather than keeping it on-site, decreasing a dispensary’s appeal to criminals.[xxviii]
In all, the DEA can and should reschedule cannabis from Schedule I to Schedule III to promote small businesses operating in the cannabis industry and eliminate the pervasive Section 280E restrictions, making the industry more profitable and safer. Furthermore, enabling businesses to save on federal taxes through deductions would stimulate local economies by providing more job opportunities.[xxix] Lastly, rescheduling cannabis would bring the U.S. in line with the growing number of nations whose stance in the 21st century recognizes cannabis for what it is: a plant.[xxx]
[i] See Fred Backus, Open marijuana use is socially acceptable, most say, CBS News (Apr. 20, 2023), https://www.cbsnews.com/news/open-marijuana-socially-acceptable-poll-2023-04-19/ [https://perma.cc/GYH3-NL49].
[ii] See, e.g., Michigan Social Equity Program, Cannabis Regul. Agency, https://www.michigan.gov/cra/sections/social-equity-program (last viewed Mar 31, 2024) [https://perma.cc/79RQ-Z26Y].
[iii] I.R.C. § 280E.
[iv] I.R.C. § 162(a)(1)-(2).
[v] I.R.C. § 280E.
[vi] See Drug Scheduling, U.S. Drug Enf't Admin. https://www.dea.gov/drug-information/drug-scheduling#:~:text=Schedule%20I%20drugs%2C%20substances%2C%20or,)%2C%20methaqualone%2C%20and%20peyote. (last viewed Mar 31, 2024) [https://perma.cc/36DN-MQJ3]; see also The Schedule I Status of Marijuana, Cong. Rsch Serv., https://crsreports.congress.gov/product/pdf/IN/IN11204 (2022) (last viewed Mar 31, 2024) (“Marijuana is listed as a Schedule I controlled substance under the CSA...”).
[vii] About, DEA, https://www.dea.gov/who-we-are/about (last viewed Mar 31, 2024) [https://perma.cc/HY9B-QTXD].
[viii] See De Lon Harris, Providing Resources to Help Cannabis Business Owners Successfully Navigate Unique Tax Responsibilities, IRS (Sept. 27, 2021), https://www.irs.gov/about-irs/providing-resources-to-help-cannabis-business-owners-successfully-navigate-unique-tax-responsibilities (“Marijuana business owners can deduct their cost of goods sold...”) [https://perma.cc/5L95-CASL].
[ix] See, e.g., Heidi Urness & Aaron Kouhoupt, SAFER Banking Act: Marijuana May Soon Become a Bigger Deal, American Bar Assoc. (Feb. 15, 2024), https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-february/safer-banking-act/ [https://perma.cc/2FGE-7VUV].
[x] See, e.g., Dan Herbeck & Samantha Christmann, Burglars steal $398K worth of product from Blasdell pot shop, Buffalo News (Mar. 30, 2024), https://buffalonews.com/news/local/crime-courts/despite-security-blasdell-marijuana-shop-owner-says-burglars-stole-389-000-in-product-from-vault/article_d9cc06ac-ede1-11ee-a21b-d39d3ead182d.html [https://perma.cc/YM23-HGB2].
[xi] See, e.g., Dan Herbeck & Samantha Christmann, supra note x; Walter Morris, DC Rapper Phil Da Phuture killed in dispensary robbery, NBC Washington (Mar. 30, 2024), https://www.nbcwashington.com/news/local/dc-rapper-phil-da-phuture-killed-in-dispensary-robbery/3579801/ [https://perma.cc/9F2J-TAFH].
[xii] Supra note iv.
[xiii] See Statement from President Biden on Marijuana Reform, The White House (Oct. 6, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/10/06/statement-from-president-biden-on-marijuana-reform/ [https://perma.cc/SUB5-K584]; see, e.g., Marijuana recommendation by US health agency hailed as first step to easing weed restrictions, AP News (Aug. 30, 2023), https://apnews.com/article/marijuana-health-schumer-becerra-dea-c00db5dabbeb9efd94cf17baff241e85 [https://perma.cc/UT9J-E5N2]; Fenit Nirappil, David Ovalle & Dan Diamond, Marijuana reclassification proposed over lower public health risk, documents show, Washington Post (Jan. 13, 2024), https://www.washingtonpost.com/health/2024/01/12/marijuana-rescheduling-schedule-3-health-risk/ [https://perma.cc/9S9L-GVA3].
[xiv]Drug Scheduling, DEA, https://www.dea.gov/drug-information/drug-scheduling (last viewed Mar 31, 2024) [https://perma.cc/UGR7-R9E4].
[xv] Legal Consequences of Rescheduling Marijuana (2024), Cong. Rsrch. Serv., https://crsreports.congress.gov/product/pdf/LSB/LSB11105 (last viewed Mar 31, 2024).
[xvi] Supra note v.
[xvii] Supra note iv.
[xviii] Romney Leads Letter to DEA Highlighting Concerns with Rescheduling Marijuana and Compliance with U.S. Treaty Obligations, Mitt Romney (Mar. 27, 2024), https://www.romney.senate.gov/romney-leads-letter-to-dea-highlighting-concerns-with-rescheduling-marijuana-and-compliance-with-u-s-treaty-obligations/#:~:text=and%20bipolar%20disorder.-,In%20prior%20rescheduling%20proceedings%2C%20the%20DEA%20has%20determined%20that%20section,abide%20by%20our%20treaty%20commitments [https://perma.cc/SY88-4NUF]; Preliminary Note Regarding Treaty Considerations, https://www.deadiversion.usdoj.gov/schedules/marijuana/Preliminary_Note_Regarding_Treaty_Considerations.pdf (last viewed Mar 31, 2024) [https://perma.cc/6TX5-YPHC].
[xix] Romney Leads Letter to DEA Highlighting Concerns with Rescheduling Marijuana and Compliance with U.S. Treaty Obligations, supra note xviii.
[xx] United Nations, The Single Convention on Narcotic Drugs, Art. 35 (1961), https://www.unodc.org/pdf/convention_1961_en.pdf (last viewed Mar 31, 2024) [https://perma.cc/6AZF-U46S].
[xxi] Nicole R. Ortiz & Charles V. Preuss, Controlled Substance Act, Nat'l Library of Medicine (Mar. 24, 2023), https://www.ncbi.nlm.nih.gov/books/NBK574544/ [https://perma.cc/5FZP-P2DW].
[xxii] Supra note xv.
[xxiii] Cannabis Legalization and Regulation, Gov't of Canada, https://www.justice.gc.ca/eng/cj-jp/cannabis/ (last viewed Apr. 1, 2024) [https://perma.cc/99S3-WDEG].
[xxiv] UN Commission on Narcotic Drugs reclassifies cannabis to recognize its therapeutic uses, World Health Org. (Dec. 4, 2020), https://www.who.int/news/item/04-12-2020-un-commission-on-narcotic-drugs-reclassifies-cannabis-to-recognize-its-therapeutic-uses [https://perma.cc/94DG-UVH2].
[xxv] Jack Guy, Germans celebrate as recreational cannabis use becomes legal, CNN (Apr. 1, 2024) https://www.cnn.com/2024/04/01/europe/germany-cannabis-legalization-day-scli-intl/index.html [https://perma.cc/U96Y-NJ2Z].
[xxvi] Id.; see also, supra note xviii (Malta and Luxembourg).
[xxvii] Supra note iii.
[xxviii] Supra note ix.
[xxix] See Martin Rowinski, How Small Businesses Drive The American Economy, Forbes (Mar. 25, 2022), https://www.forbes.com/sites/forbesbusinesscouncil/2022/03/25/how-small-businesses-drive-the-american-economy/?sh=3d0676844169 [https://perma.cc/X6TF-5SMF].
[xxx] Supra note xxii.