The cannabis industry is on the brink of significant change with the proposed rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act (CSA). This move, driven by the Biden administration, could have far-reaching effects on how businesses operate, how cannabis is viewed under federal law, and the financial landscape for many in the industry. But what exactly does this rescheduling mean for cannabis businesses, patients, and the future of the industry?
What Does Rescheduling to Schedule III Mean?
Currently, cannabis is classified as a Schedule I drug, which places it in the same category as heroin and LSD. Schedule I drugs are considered to have “no currently accepted medical use” and a high potential for abuse. This classification has imposed significant regulatory barriers on cannabis businesses, limiting research, access to banking services, and even basic tax deductions.
By moving cannabis to Schedule III, the federal government would acknowledge its medical use and lower the level of restriction on its handling. Drugs in Schedule III, such as anabolic steroids, are still regulated but can be legally prescribed and have less potential for abuse. This shift would open doors for cannabis companies to operate more like traditional businesses, with access to loans, banking services, and insurance that has been difficult to secure due to the current classification.
The Impact on Cannabis Businesses
The potential rescheduling could be a game changer for cannabis businesses, especially in terms of tax liabilities. Under the current Schedule I classification, cannabis businesses are subject to Section 280E of the Internal Revenue Code, which prohibits companies from claiming deductions and credits for most business expenses. This has been a significant financial burden on the industry, forcing cannabis companies to operate with higher tax liabilities than most other businesses.
If cannabis moves to Schedule III, businesses could start claiming standard tax deductions, reducing their tax burden and freeing up capital for expansion, research, or reducing consumer prices. This change could also allow cannabis companies to engage more freely with banks and investors, reducing their reliance on cash and providing a more secure and transparent financial environment.
Section 280E and Its Implications
A shift to Schedule III could mean the end of Section 280E’s impact on cannabis businesses. Section 280E currently prevents them from deducting ordinary business expenses like rent, payroll, and marketing, resulting in a significantly higher tax burden compared to other industries.
However, with the potential rescheduling, you may finally be able to operate on a level playing field in terms of taxation. This change would not only make the industry more attractive to investors but could also lead to lower prices for consumers as businesses pass on savings from reduced tax burdens.
Banking and Financial Access
One of the most significant challenges the cannabis industry faces today is the lack of access to traditional banking services. Many banks avoid working with cannabis companies because of the federal Schedule I classification, which makes it risky from a legal standpoint. Without access to banking, many businesses are forced to deal primarily in cash, increasing the risk of theft and complicating financial management.
Rescheduling cannabis to Schedule III would likely encourage banks to work with cannabis businesses, alleviating these financial pressures. Businesses could open bank accounts, take out loans, and accept electronic payments—steps that would make day-to-day operations safer and more efficient.
Medical and Research Advancements
Rescheduling cannabis could also lead to a surge in medical research. Under the current Schedule I classification, research on cannabis has been tightly restricted, limiting our understanding of its medical potential. Moving cannabis to Schedule III would ease these restrictions, allowing for more comprehensive studies on its benefits and risks.
This could pave the way for new treatments and medications, increasing cannabis’s role in mainstream healthcare. Biotech and pharmaceutical companies may become more involved, investing in cannabis-based treatments that could improve patient care and expand the industry’s medical applications.
Questions That Remain
While the proposed rescheduling is promising, several questions remain:
- Will the rescheduling apply only to medical cannabis, or will it extend to recreational use?
- How will cannabis businesses navigate complex compliance issues related to federal and state regulations?
- Will the illicit market shrink as legal cannabis becomes more accessible and affordable?
Additionally, companies will need to bolster their internal controls and compliance processes. With increased access to banking and electronic payments, businesses must ensure that their cybersecurity measures are robust enough to protect sensitive information, including patient data and financial records. Service Organization Controls (SOC) reports and other verification systems will become increasingly important as businesses scale.
The Future of Cannabis: More Than Just a Tax Break
The rescheduling of cannabis could lead to more than just tax relief. With reduced financial burdens and increased access to banking, we could see a wave of mergers and acquisitions within the cannabis industry. As smaller businesses gain the ability to scale, they may merge with larger companies or attract investors, leading to a more consolidated and efficient market.
Moreover, rescheduling could mark a turning point for pharmaceutical investment in cannabis. Companies may begin to develop new cannabis-based treatments, and the increased legitimacy of medical cannabis could drive growth in the life sciences sector.
What Does This Mean for Your Business?
For businesses and investors, the rescheduling of cannabis is an exciting development that could lead to significant financial benefits, reduced regulatory hurdles, and expanded opportunities. However, the process of transitioning to a more regulated industry will come with challenges.
At GreenGrowth CPAs, we provide tax, audit, accounting, and financial services tailored to help you navigate the evolving cannabis landscape. Our team of industry experts has been preparing for these changes, and we are actively helping our clients pivot to take full advantage of upcoming opportunities.
By leveraging our 471c process, we ensure an efficient and painless approach to recouping funds from the IRS and maximizing tax savings. Many of our clients are already exploring options to refile and recover money without risking issues with the IRS.
We may not know exactly what legislatures and governmental agencies will decide in elections or how global events might impact regulations, but we are here to guide you. Contact us today to schedule a free consultation and discover how we can help your cannabis business thrive.
