As President Trump took steps to move cannabis to a less stringent classification under the Controlled Substances Act, several Senate and House Republicans are urging caution. The lawmakers contend the change would “normalize an addictive substance” and “deepen the nation’s ongoing drug crisis.”
Marijuana and the Federal Tax Code
Under current federal law, cannabis is treated as a Schedule I controlled substance – drugs in this category have no currently accepted medical use and a high abuse potential. IRC § 280E prohibits businesses that traffic in controlled substances on Schedules I and II from deducting or crediting any business expenses, even if their activities are legal under state law. That includes deductions for depreciation under IRC § 167, charitable contributions under IRC § 170, and state and local taxes under IRC § 164. The result is that cannabis businesses face a significantly higher effective tax rate compared to other industries.
Last year, the Department of Justice proposed to move marijuana from Schedule I to III of the Controlled Substances Act. (89 FR 44597, 5/21/24) But until a final rule is published, marijuana remains subject to § 280E limitations.
While the proposed rule was issued under the Biden administration, President Trump signaled his support for downgrading marijuana in a December 18 executive order. The EO calls on the Attorney General to “take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner.”
Trump’s stated aim is to increase medical marijuana research – particularly regarding “the substance’s ability to ease chronic pain. “The Federal Government must improve the research infrastructure for medical marijuana to better serve Americans,” reads the EO. However, rescheduling marijuana also would have major tax consequences for the cannabis industry.
Some Republicans Voice Concerns
Despite Trump’s EO, several Republican lawmakers are skeptical of moving marijuana off Schedule I. In a December 17 letter, 22 senators cautioned that the substance has a “high potential for abuse” and has been tied to “depression, anxiety, suicide planning, and psychotic episodes.” The lawmakers also have concerns that greater access to marijuana will negatively impact productivity and roadway safety.
The senators also call out the tax consequences of rescheduling. They note that cannabis companies “are currently prohibited from taking business tax deductions under Section 280E.” And they contend that a shift to Schedule II would “give a massive tax break to marijuana companies.”
A day later, a group of House Republicans echoed concerns about rescheduling cannabis. In a December 18 letter, 26 lawmakers called the Biden administration’s proposal “wrong,” accusing Trump’s predecessor of trying to “expand the use of an addictive drug for partisan gain.” They contend rescheduling is not necessary for medical research purposes, noting research on cannabis has already occurred for years.
The House letter, too, calls out the tax relief available to the cannabis industry if the substance is downgraded. “The marijuana industry wants Schedule III because large marijuana companies will receive billions in tax relief,” say the lawmakers. “Tax relief should be prioritized for hard-working, law-abiding Americans and businesses, not marijuana shops,” they add.
State Support for the Cannabis Downgrade
Republicans are split on the consequences of rescheduling, however, with many state-level lawmakers supporting the change.
In a bipartisan letter this July, 32 state attorneys general urged Congress to enact legislation that would “move cannabis commerce into the regulated banking system.” They contend that because the cannabis industry lacks access to regular banking, business is conducted in cash, putting employees and customers “at greater risk of violent crime in pursuit of that cash.”
And it’s not just state-level Republicans who support the change – Representative Dave Joyce (R-OH) brought up those same concerns during a House Appropriations Financial Services and General Government Subcommittee hearing last year. Legal cannabis businesses must “hire armored vehicles to transport their cash to make tax payments to the IRS as well as local offices,” according to Joyce.
But the attorneys general support cannabis industry access to banking for another reason – the potential to increase state tax revenue. “The current lack of regular banking by lawful cannabis businesses within our jurisdictions also inhibits the states’ ability to collect taxes and conduct meaningful oversight of those businesses’ revenues,” the attorneys general wrote in their July letter.
For more on disallowed deductions for drug trafficking, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-2632.
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