How Marijuana Reclassification affects Tax Treatment of Businesses pursuant to 280E IRS Tax Code


Summary

Downgrading marijuana from Schedule I to Schedule II has no effect on businesses in the cannabis industry with regards to tax liability and writing off expenses under 26 U.S.C. § 280E.

Reclassification of Marijuana

Marijuana is currently classified as a Schedule I controlled substance by the DEA under the Controlled Substances Act (CSA). Under this classification, scientific research of marijuana is heavily restricted.

Current talk regarding reclassification then revolves around downgrading marijuana to Schedule II which would lessen these restrictions. Schedule II substances are considered to have a legitimate medical use despite their high potential for abuse.

26 U.S.C. § 280E and Reclassification

While many states have legalized medical use of marijuana and there are even state sponsored dispensaries operating, current regulation under 26 U.S.C. § 280E prevents these business from writing off expenses which can drastically incre[if gte vml 1]><v:rect id="officeArt_x0020_object" o:spid="_x0000_s1026" style='position:absolute; margin-left:60pt;margin-top:64.1pt;width:492pt;height:21pt;z-index:251660288; visibility:visible;mso-wrap-style:square;mso-wrap-distance-left:12pt; mso-wrap-distance-top:12pt;mso-wrap-distance-right:12pt; mso-wrap-distance-bottom:12pt;mso-position-horizontal:absolute; mso-position-horizontal-relative:page;mso-position-vertical:absolute; mso-position-vertical-relative:page;v-text-anchor:top' o:gfxdata="UEsDBBQABgAIAAAAIQC75UiUBQEAAB4CAAATAAAAW0NvbnRlbnRfVHlwZXNdLnhtbKSRvU7DMBSF dyTewfKKEqcMCKEmHfgZgaE8wMW+SSwc27JvS/v23KTJgkoXFsu+P+c7Ol5vDoMTe0zZBl/LVVlJ gV4HY31Xy4/tS3EvRSbwBlzwWMsjZrlprq/W22PELHjb51r2RPFBqax7HCCXIaLnThvSAMTP1KkI 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A more in-depth explanation regarding these regulations can be found here.

A downgrade from Schedule I to II does not seem to have an effect on federal income tax liability according to the text of 26 U.S.C. § 280E:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Conclusion

Unless the DEA either reclassifies marijuana as a Schedule III, IV, V controlled substance or removes it from the drug schedules altogether, tax liabilities are likely to remain burdensome, not to mention the same, for those involved in cannabis related businesses.


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