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An executive order from President Donald Trump issued in December could accelerate the effort to shift marijuana to a less restrictive schedule, which would have follow-on effects for the taxation of related businesses. A rescheduling of the drug from Schedule I to Schedule III of the Controlled Substances Act (CSA) would allow state-licensed businesses to deduct normal business expenses and lower their tax burden.
Executive Order 14370 directs the U.S. 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 in accordance with Federal law.” The Department of Health and Human Services recommended to change to the Drug Enforcement Agency (DEA) in 2023, based on scientific support for the drug’s medical benefits, and the Federal Drug Administration (FDA) and National Institute on Drug Abuse concurred. The Department of Justice, under which the DEA sits, issued a proposed rule on the rescheduling in May 2024, which has been awaiting an administrative law hearing.
The rescheduling would not legalize recreational use of marijuana at the federal level but would allow the substance to be used for certain medical purposes allowed by the DEA and FDA. Manufacturers and distributors would need to register with the DEA and comply with regulatory requirements for Schedule III substances.
Tax Code Section 280E disallows credits or deductions for businesses that consist of trafficking in Schedule I and Schedule II controlled substances. Under Schedule III, state-licensed businesses dealing with medical marijuana could lower their federal taxes.
Grant Thornton insight:
Most federally regulated financial institutions, major credit card networks, traditional insurance providers, federal contractors and compliance-heavy professional services firms avoid these businesses altogether while cannabis is still a Schedule I controlled substance under federal law. Working with such clients exposes these firms to compliance burdens, potential penalties and costly reporting requirements. In addition to allowing federal business tax deductions, the move to Schedule III would likely lead more companies to offer services to state-licensed sellers of medical marijuana.
The Justice Department has not issued any new rulemaking notice or decision on reclassification since the president issued his executive order. The full rescheduling process, if it moves forward, could still take years.
While it is likely not sufficient to overrule any administrative change made under Trump, there is organized opposition among some Republicans, including in Congress. Although the CSA grants the attorney general and DEA authority over drug scheduling decisions, Congress can override agency action by statute. Just ahead of the president’s executive order, groups of GOP lawmakers — 23 senators and 26 House members — sent letters to Trump urging him not to support the rescheduling.
A group of Republican state attorneys general also has criticized the president’s rescheduling push, saying cannabis is “properly” classified as a Schedule I substance.
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