What does the rescheduling of Cannabis do?


Cannabis taxes are complicated. Reporting “illegal” activity to the Federal government comes with a lot of conservative enforcement of extreme laws. In particular, 280E. Currently, Marijuana is a Schedule 1 controlled substance sitting right next to Heroin. (Cocaine is Schedule 2 for reference.) Code section 280E states:

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.

Basically, 280E makes it so you cannot deduct the normal and ordinary business expenses associated with the sale of cannabis. Everything becomes disallowed that is directly associated with the cannabis part of the business. Well, almost everything. There are certain direct cost of goods sold that can still be deducted. We would need another article entirely to breakdown when, what, why, and how. For further reading, I advise case law. Harborside was a case that went to Tax Court that significantly influenced how 280E is currently applied and audited; PATIENTS MUTUAL ASSISTANCE COLLECTIVE CORPORATION d.b.a. HARBORSIDE HEALTH CENTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. I highly recommend reading the case; it is decidedly informative and has an amazing legal review of past case law.

There have been proposals on the table since the 1970s to take Marijuana off of Schedule 1 and move it somewhere else. In my opinion, the most logical thing for our federal government to do is to remove it from the scheduled drugs altogether and place it next to Alcohol and Tabacco. However, that is an unlikely outcome in the near future. The most likely outcome is that they will move Marijuana to Schedule 2.

What happens to 280E rules if Marijuana is rescheduled to Schedule 2? NOTHING. 280E still applies. The current proposed legislation is leaning towards rescheduling to Schedule 2, not 3, that would make a big tax difference. If Marijuana is rescheduled to 3 or de-scheduled altogether, the rules of 280E no longer apply and we move back into the comfort zone of normal everyday business tax codes.

However, the Cannabis industry would take a win if the drug was rescheduled, even if it lands on Schedule 2. What that does is give the ability to have more medical research around Marijuana to prove out what alternative medicine has been saying for years – there are true medical purposes for this plant. Further research would lend support to the Cannabis industry’s current biggest obstacle and settle the politically charged debate around safety, efficacy, and potential for harmful abuse.

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Liz Mason is a serial entrepreneur, a giant nerd, and an involved accounting vanguard. She is the Founder of High Rock Accounting, Rebel Rock Accounting, TheDepartment.Tax, and a few other related brands. Liz speaks on a national stage, guests stars on podcasts, and writes frequently. To further her passion for the advancement of the accounting profession, Liz currently serves as a Xero National Ambassador and as the Content Strategist for Tax Practice News. Liz started her career in tax at Grant Thornton (at 20) and automated a portion of her job landing her in the national tax practice. She spent a decade in large public accounting firms working on highly technical tax consulting before branching off on her own. Liz utilizes her creativity and passion at her company to uproot traditional practices and replace them with innovative concepts. She finds joy in efficient technology and her core belief is that everyone and everything can continuously improve (she says "be better" too often). When Liz isn't planning world domination in accounting, she is a die-hard skier, down for any adventure, plays the ukulele, reads everything, and has a good sense of humor. If you're looking for her, you can find her traveling the world and enjoying new food and cultures with her young son. Follow Liz and High Rock Accounting on Twitter at @LizzyNorMa and @HighRockCPAs.